PMI falls for third straight month

BEIJING - China's manufacturing expanded at the slowest pace in six months as higher interest rates and lending curbs dampened demand.

The Purchasing Managers' Index fell to 52.2 from 52.9 in January, the third monthly decline, the China Federation of Logistics and Purchasing said on its website on Monday.

The gauge of input prices climbed to 70.1, the highest level since November.

On Sunday, Premier Wen Jiabao pledged to contain gains in consumer prices and tackle surging property prices.

Wen may outline additional measures to tame inflation and cool economic growth when the annual session of the National People's Congress opens later this week.

"This is a good number, suggesting Beijing's policy tightening is starting to cool excessive growth and inflation," said Qu Hongbin, a Hong Kong-based economist at HSBC Holdings Plc. The government "still needs to step up measures to combat inflation in the months ahead", he added, predicting that the People's Bank of China, the central bank, will raise interest rates and the required reserve ratio for banks.

"Cost-driven inflation pressure is still high," the logistics federation said in a statement today accompanying the data release. "Upward pressure on the CPI is still significant," the federation said, citing a drought in China that has boosted food prices, the impact of the Middle East turmoil on oil, and liquidity injections by the US Federal Reserve.

China raised the prices of gasoline and diesel on Feb 20 by as much as 4.6 percent after crude oil in London rose above $100 a barrel. The government previously increased costs on Dec 22.

Consumer-price inflation may have cooled to 4.8 percent in February from 4.9 percent in January, according to China International Capital Corp and Shenyin & Wanguo Securities Co on Feb 25.

Still, non-food inflation rose to the highest level in at least six years in January and companies will pass on higher prices to consumers, GF Securities analysts said on Monday.

The central bank has already raised its benchmark one-year lending and deposit rates three times since mid-October and imposed eight publicly announced increases in the reserve requirement ratio. It has also used the so-called differentiated reserve requirement on 40 banks, adjusting the level of deposits individual lenders must keep as reserves.

"The PMI figure shows that input prices continued to rise at a very fast pace," said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong.

Bloomberg News

(China Daily 03/02/2011 page13)