Increased manufacturing orders pave the way for economic rebound; pressure may build on prices

China's factory output may accelerate to a two-year high in January as manufacturers see a growing number of orders, signaling a steady economic rebound is in sight.

The HSBC Flash China Manufacturing Purchasing Managers Index, a gauge of the country's manufacturing activity, rose to 51.9 in January, from 51.5 in December, HSBC Holdings PLC said on Thursday.

The figure, which is at its highest since Jan 2011, has increased for three consecutive months, suggesting steady expansion of China's huge manufacturing sector.

A PMI reading above 50 indicates expansion, while a reading below 50 indicates contraction.

HSBC's figure was in line with the official PMI reading, which was 50.6 for December, a third month of expansion.

Analysts saw the January Flash PMI figure as the latest indication of a rebound and a boost for market confidence in the outlook for China this year.

China's economy saw its slowest annual pace of expansion in 13 years in 2012, growing 7.8 percent.

"Thanks to the continuous gains in new business, manufacturers accelerated production by additional hiring and more purchases," Qu Hongbin, chief China economist with HSBC, said in a statement.

"Despite still-tepid external demand, the domestic-driven restocking process is likely to add steam to China's ongoing recovery in coming months."

Fan Guilong, an analyst with Huarong Securities, said: "Inventory continues to fall, showing that demand is recovering faster than supply, which could be translated into further economic gains."

However, he said the input price sub index has been increasing faster than the output price, meaning that manufacturers' profits could be further squeezed.

The preliminary PMI figure is based on 85 percent to 90 percent of responses to a survey of purchasing executives from more than 420 manufacturing firms, and is issued about a week before the final PMI figure.

HSBC said the sub-indices for output, new orders and employment - accounting for three-quarters of the flash PMI, all improved in January, hovering above 50.

The output index climbed to 22-month highs, while the employment sub-index was at its highest since May 2011.

Demand for Chinese exports also improved slightly this month, with the new export orders sub-index rising to 50.1, up from 49.2 in December. But the global environment may remain sluggish for China in the next year or two.

On Wednesday, the International Monetary Fund cut its global growth estimate for 2013 and 2014 each by 0.1 percentage points, citing ongoing crisis in the eurozone.

Although China's growth prospects remained unchanged at 8.2 percent for 2013, eurozone economies, China's major trade partners, may fall into a 0.2 percent contraction, 0.3 percentage points lower than the previous estimate, the IMF report said.

Meanwhile, the PMI showed pressure may be building on prices.

The input price sub-index was at its highest since September 2011, while the output price sub-index pulled back slightly.

Analysts warned that faster growth in manufacturing sectors is also expected to fuel inflation. While they are cautiously optimistic about China's economic prospects this year, many are betting on steady State investment to stabilize growth.

Fu Peng, an analyst with China Galaxy Securities, said rising manufacturing activities are largely due to a rapid increase in fixed-asset investment in the fourth quarter of 2012, which drove up overall social demand.

However, Fitch Ratings said an ever-increasing investment to GDP ratio is inherently unsustainable for China, adding that the country will rebalance its economy toward more consumption-led growth.

The transition will see demand for services including tourism, restaurants and financial services rising commensurately, Fitch said.

[email protected]

(China Daily 01/25/2013 page14)