China's Inflation May Cool With Factory Slowdown, Export Earnings Program
China’s Inflation May Cool as Manufacturing Slows
Qilai Shen/Bloomberg
A worker welds a steel frame at the China CSSC Holdings Ltd. Chengxi Shipyard in Jiangyin, China.
A worker welds a steel frame at the China CSSC Holdings Ltd. Chengxi Shipyard in Jiangyin, China. Photographer: Qilai Shen/Bloomberg
Chinese Premier Wen Jiabao
Jock Fistick/Bloomberg
Chinese Premier Wen Jiabao.
Chinese Premier Wen Jiabao. Photographer: Jock Fistick/Bloomberg
China’s inflation may cool after manufacturing growth slowed in December because of a tighter monetary policy and the closure of energy-wasting and highly polluting factories.
A purchasing managers’ index fell to 53.9 from 55.2 in November, China’s logistics federation and the statistics bureau said Jan. 1. Manufacturers’ input costs rose at a slower pace, the report showed.
Premier Wen Jiabao is seeking to limit bank lending and inflows of capital that could fuel inflation after a record expansion in credit drove the nation’s recovery. The central bank raised interest rates on Christmas Day and, six days later, the currency regulator said it was expanding a program to let exporters keep revenue overseas.
“A slower but still robust pace of manufacturing expansion is welcome because overheating is a risk policy makers want to avoid,” said Shen Jianguang, a Hong Kong- based economist at Mizuho Securities Asia Ltd. who has worked for the European Central Bank and the International Monetary Fund. “Another rate hike could come as soon as this month.”
Growth slowed for the first time in five months and the reading was less than any of 13 analysts’ estimates in a Bloomberg News survey. Their median forecast was 55. In contrast, a non-manufacturing PMI rose in December from November’s level, a separate logistics federation report showed today.
Inflation Forecasts
December’s annual inflation rate probably fell from November’s 5.1 percent, a 28-month high, according to economists at Bank of America-Merrill Lynch and China International Capital Corp. CICC estimates consumer prices rose 4.5 percent last month from a year earlier, while Merrill’s forecast is 4.8 percent.
A higher base for comparison may have helped to pare December’s increase. Credit Suisse Group AG. cautioned today that inflation may surge back to exceed 6 percent by mid-year “after a brief pause over the next two to three months.”
The central bank raised interest rates twice in the fourth quarter, ratcheted up banks’ reserve requirements and allowed gains by the yuan against the dollar.
Rules for Exporters
A program letting qualified Chinese exporters park foreign-currency earnings in overseas accounts was expanded nationwide from Jan. 1 after previous trials in regions including Guangdong, according to the state-run Xinhua News Agency. The businesses can decide how long to keep the money offshore, Xinhua said Dec. 31, citing the State Administration of Foreign Exchange.
SAFE said the move encourages investment abroad and may help to balance the nation’s international payments.
Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong, said today that while the rules could help to reduce gains in the nation’s foreign-exchange reserves, already a world-record $2.65 trillion, the effects may be limited because exporters will mostly want to bring money home.
Slower manufacturing growth is welcome and may help reduce inflation pressures, said Ken Peng, a Beijing-based economist at Citigroup Inc. He doesn’t see “much risk of a sharp economic slowdown,” he said.
Slide in Stocks
China’s key stock gauge declined 14 percent last year, the worst performer among the world’s 14 biggest benchmark indexes, because of concern that government curbs to counter inflation will crimp growth and profits. The measure jumped 80 percent in 2009 as a 4 trillion-yuan ($610 billion) stimulus package and record lending helped the economy recover.
Chinese markets are closed today for a holiday. Hong Kong’s Hang Seng Index rose 0.5 percent as of 10:38 a.m. local time.
The government-backed PMI gives an indication of manufacturing activity by surveying more than 820 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.
An output index fell to 57.5 last month from 58.5 in November and a measure of new orders dropped to 55.4 from 58.3, while an index of new export orders rose to 53.5 from 53.2. An input-price index dropped 6.8 points to 66.7 after surging in November to the highest level since June 2008.
Property Crackdown
A separate Dec. 30 report from HSBC Holdings Plc and Markit Economics indicated that manufacturing growth cooled in December and input and output prices rose at a slower pace.
Besides tightening monetary policy, officials have cracked down on real-estate speculation and closed factories to meet energy-efficiency and pollution targets.
The numbers released on Jan. 1 reflect government efforts to limit price gains and adjust the nation’s growth model, the logistics federation said in a statement. Economic momentum remains steady, it said. At the same time, the organization cautioned that inflation is spreading from food to raw materials and energy and may erode the nation’s export competitiveness.
Peng Sen, the vice chairman of the National Development and Reform Commission, said last month that the nation faces a long-term fight against inflation, citing supply shortages, commodity costs and excessive liquidity.
Central bank Governor Zhou Xiaochuan pledged Dec. 31 to try to keep prices “basically stable” this year. Wen said Jan. 1 that the government will put a higher priority on stabilizing prices of food and other necessities. Besides consumer price inflation, the government is seeking to limit asset bubbles in the real-estate market.
A survey released by the central bank in December showed consumers more concerned about prices than at any time in the past decade. Food costs climbed 11.7 percent in November from a year earlier, with Starbucks Corp. and McDonald’s Corp. among companies to announce price increases in the past two months.
--Li Yanping, with assistance from Sophie Leung, Zheng Lifei and Jay Wang. Editors: Paul Panckhurst, Ian Rowley.
To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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