Input cost inflation surged for Chinese manufacturers in November; PMI at 55.3

The Chinese manufacturing sector strengthened further in November, with overall business conditions improving at the strongest pace in eight months. This was signaled by the headline HSBC Purchasing Managers’ Index (PMI) posting 55.3, up from 54.8 in October. Considerable price pressures were also indicated by November’s survey, with both output and input prices rising at substantial and accelerated rates.

Manufacturing production in China rose again during November. The latest increase was steep, and much stronger than the long-run series average. Where a rise in manufacturing production was signaled, panelists commonly linked growth to further gains in overall new work, which rose at the fastest rate in eight months. New export orders also increased in November, with the rate of growth quickening to a seven-month high. Nonetheless, a faster increase in total new work relative to new export orders, suggested that overall new business growth was centered on the domestic market.

Further new order wins contributed to another rise in backlogs of work in November, which increased at a solid rate that was the strongest since May. Nonetheless, employee numbers rose only fractionally in November.

The quantity of inputs bought by manufacturers increased again in November, primarily reflecting new business wins. Some panelists also reported raising their purchasing in anticipation of future price rises. The rate of growth was the sharpest since January. That was insufficient, however, to prevent another fall in stocks of purchases, as firms utilized existing inventories amid raw material shortages. This centered on a lack of supply at suppliers and, as a result, average vendor performance deteriorated at the strongest rate since July 2008.

Shortages of inputs afforded suppliers greater scope to raise their prices in November. Consequently, average input costs increased considerably, with the rate of inflation quickening to the fourth-fastest in the series history. Prices paid for cotton, grain, oil and steel were reported as having risen since October.

Manufacturers reported passing on higher input costs to customers through increased factory gate prices, which rose at a series-record rate in November.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China and co-head of Asian economic research at HSBC, said: “The stronger reading of the November Manufacturing PMI, especially the faster rise in input prices, against the backdrop of the Fed's QE2, is likely to translate into concern about inflation. We expect Beijing to step up its efforts of quantitative tightening and to hike interest rates by 25 basis points in the coming months to check inflation.”