China manufacturing pace adds to pressure

Chinese manufacturing expanded at a faster pace last month, highlighting overheating risks in the world's fastest-growing major economy.

The Purchasing Managers' Index rose to a seasonally adjusted 55.7 from 55.1 in March, the Federation of Logistics and Purchasing said yesterday.

China is cracking down on property speculation to prevent asset bubbles and restrain inflation after the economy grew 11.9 per cent in the first quarter.

Europe's debt crisis makes an immediate interest-rate increase in China less likely and could delay gains in the yuan by signalling weakness in the global economy, says Bank of America-Merrill Lynch.

"There are signs of overheating pressures although Government measures are helping to cool the property market," Chang Jian, an economist at Barclays Capital Asia, said in Hong Kong before the report was released. "The Government will be monitoring closely developments in Europe when making decisions on policy moves."

Chang said interest rates could rise this quarter as inflation pressures grow.

An output index rose to 59.1 from 58.4 in March, the new-order index advanced to 59.3 from 58.1 and the export-order index stayed unchanged at 54.5. An input-price index increased to 72.6, the highest in 22 months. The PMI figure compares with a record-low 38.8 in November 2008, when the credit crisis and recessions in overseas markets sent export orders plunging. The economy rebounded on the 4 trillion yuan (US$586 billion) stimulus plan announced that month and record new loans from banks.

Exports are recovering, climbing 29 per cent in the first quarter from a year earlier, with their value topping the level of the same period in 2008, before the crisis hit. Industrial companies' profits are also up, more than doubling in the first quarter from a year earlier, statistics bureau figures for 24 provinces showed.

Baoshan Iron & Steel, the nation's largest publicly traded steelmaker, estimates that its first-half profit may increase as much as 10-fold from a year earlier.

The central bank last week reaffirmed a moderately loose monetary policy, adding that the world's recovery remains on a fragile foundation. China faces a complex economic environment this year amid weak global recovery and domestic problems including difficulty in managing inflation expectations and risks in local government borrowing and property loans, banking regulator Liu Mingkang said.

Last month's acceleration in the PMI was partly seasonal as the index has usually been high in March and April in past years.

While officials have pared back stimulus by targeting a 22 per cent reduction in new loans this year and raising banks' reserve requirements, the central bank is yet to reverse the cuts in interest rates made to counter the global crisis.

It has also left the yuan pegged at about 6.83 per dollar since July 2008 to aid exporters.

- BLOOMBERG