China Sustains Expansion as Inflation Pressures Grow (Update3)

By Bloomberg News
Feb. 1 (Bloomberg) -- China, the world’s third-biggest economy, sustained its manufacturing expansion in January as export orders jumped and inflation pressures grew, two surveys showed today.
A purchasing managers’ index released by HSBC Holdings Plc and Markit Economics rose to a record. A second survey, by the Federation of Logistics and Purchasing, recorded the second- fastest growth since 2008. India reported an acceleration of manufacturing today and Australia posted an expansion.
Asian stocks tumbled as China’s reports spurred concern that the government will have to escalate efforts to rein in the credit growth that has fueled the nation’s infrastructure spending surge. Policy makers may raise interest rates by the end of June, after already increasing banks’ reserve requirements and targeting reduced credit growth, according to the median estimate in a Bloomberg News survey of economists.
"These numbers should reinforce the case for policy tightening in the months ahead, including a move towards a stronger yuan," said Brian Jackson, a Hong Kong-based emerging markets strategist at Royal Bank of Canada.
The benchmark Shanghai Composite Index of stocks fell 1.5 percent as of 2:47 p.m. local time, extending this year’s slide to 10.2 percent. Twelve-month non-deliverable yuan forwards indicated that traders expect the Chinese currency to appreciate
2.8 percent in the next year against the dollar. The yuan has been pegged to the U.S. currency for the past 18 months.

Growth Priority

Russian billionaire Oleg Deripaska said concerns that Chinese efforts to contain inflation may derail the economy are "unreasonable" and growth will remain officials’ priority. "More money supply may cause higher inflation, but I can’t see that stopping their growth," Deripaska, whose United Co. Rusal Ltd.
last month became the first Russian company to list in Hong Kong, said in a Jan. 29 Bloomberg Television interview.
The HSBC index rose to a seasonally adjusted 57.4 from 56.1 in December and the survey showed the biggest gains in input and output prices since July 2008. Export sales rose at a "near- record rate," a statement on Markit’s Web site said, without giving numbers.
The government-backed Purchasing Managers’ Index fell to a seasonally adjusted 55.8 from 56.6 in December, an e-mailed statement showed. Growth in output and orders slowed. Export demand quickened and an index of input prices rose to the highest since July 2008.

Weather Effect

The figures may partly reflect disruptions from cold weather and snowstorms, JPMorgan Chase & Co. and UBS AG. said.
Credit Suisse AG cited "credit tightening" for smaller gains in orders.
The credit boom has added to the risk of surging inflation and asset bubbles in the economy that Nomura Holdings Inc. says will contribute a third of global growth this year.
Chinese central bank adviser Fan Gang said today in Beijing that while inflation is a concern, asset bubbles are the "real worry" as inflows of capital add to excessive liquidity in the financial system.
Banks lent almost 1.6 trillion yuan ($234 billion) last month, the Economic Information Daily reported today on its Web site. That’s more than a fifth of the banking regulator’s target for lending this year.

Asia’s Rise

China’s growth accelerated to 10.7 percent, the fastest pace since 2007, in the fourth quarter of 2009 on a 4 trillion yuan ($586 billion) stimulus package and record lending. Across Asia, South Korea reported today the biggest gain in exports in more than 20 years and Indonesia, Thailand and South Korea said inflation accelerated.
The logistics federation’s figure for Chinese manufacturing was less than the median 56.5 estimate in a Bloomberg News survey of 16 economists, declining for the first time in eight months. The output index fell to 60.5 from 61.4 in December. The export-orders index rose to 53.2 from 52.6.
"China’s economy is at a crucial stage of moving from rebounding to stabilizing" with exports set to make a bigger contribution to growth, said Zhang Liqun, a researcher at the State Council Development and Research Center. "In the meantime, companies may face a tougher environment with rising costs and intensified competition."

Profit Gains

Companies benefiting from the nation’s rebound include Chongqing Changan Automobile Co., which said Jan. 27 that 2009 profit may have climbed more than 4000 percent on higher sales and cost controls. China Railway Construction Co. said the same day that profit likely increased more than 50 percent from 3.6 billion yuan a year earlier because of the nation’s extra infrastructure spending.
The economy may gain momentum this quarter as exports surge 30 percent, making an interest-rate increase more likely as inflation rises, according to China International Capital Corp.
China’s 10.5 percent expansion this year will compare with the global economy’s 4.2 percent, Nomura forecasts.
The nation’s growth may accelerate to 12 percent this quarter, triggering a rate increase as early as this month as inflation rises to 3 percent, according to Sun Mingchun, an economist at Nomura in Hong Kong.
China is pursuing a "proactive fiscal policy" and moderately loose monetary policy," Vice Premier Li Keqiang reaffirmed in a speech on Jan. 28 at the World Economic Forum in Davos, Switzerland.
The manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, is based on replies to questionnaires sent to purchasing executives at more than 730 companies in 20 industries. It started in 2005.
The official PMI surveys mainly large and state-owned companies, while HSBC’s sample of more than 400 is weighted more toward smaller businesses and export-related companies, said Xing Ziqiang, an economist at China International Capital Corp.
It began in 2004.