China's factory output in new boom

City A.M. Reporter
China's factories ramped up their production last month and were buoyed by an influx of new business, highlighting the strength of the world's second-largest economy but also pointing to price pressures.

Two surveys of the manufacturing sector, which are designed to provide an early indication of conditions in a broad range of industries, both jumped to six-month highs in October.

The official purchasing managers' index (PMI) rose to 54.7 in the month from 53.8 in September, blowing past expectations. The HSBC PMI, a private companion, climbed to 54.8 from 52.9.

The increase was all the more impressive since the official survey has traditionally sagged in October, weighed down by the week-long National Day holiday, when factory production slows.

"The fact that the PMI went up despite this seasonal bias suggests real activity growth was likely to have been exceedingly strong in October," Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.

Asian shares were lifted by the surprisingly strong PMIs, with the main index in Shanghai rising 1.9 percent in the morning session.

Four straight months of stronger official PMIs jive with other signs that China's economy has built up a head of steam.

This momentum gave the government the confidence to raise interest rates on October 19 for the first time in nearly three years, and some economists believe another increase could be in store before the end of the year.

Both surveys showed that output expansion was driven by domestic growth, not external demand.

While the sub-index for total new orders in the official PMI climbed to a six-month high of 58.2 from 56.3, that for new export orders dipped to 52.6 from 52.8. The HSBC survey revealed a similar pattern.

"Another upbeat reading for the HSBC China Manufacturing PMI suggests strong growth momentum in domestic demand to warrant about nine per cent GDP growth in the fourth quarter, despite the still soft increase in new export orders," said Qu Hongbin, chief economist for China at HSBC.

The 54.7 reading for the official PMI, released by the China Federation of Logistics and Purchasing (CFLP), was higher than the median forecast of 52.9 in a Reuters poll of 12 economists and, in fact, higher than every individual forecast.

But Zhang Liqun, a government researcher, cautioned against over-optimism, saying that growth was likely to ease and that inflationary pressures were a concern