The mainland is likely to report another set of strong economic indicators for November this week following the release of strong PMI figures last week.

The CPI figure, which is urgently awaited by the market, is expected to hit a high of 4.6 percent as agricultural product prices kept climbing last month. The anticipated November headline CPI figure, exceeding the 4.4 percentr year-on-year rate recorded in October, is the highest so far this year. This may ignite market concerns that more restrictive measures may be in store.

Agricultural product prices continued to surge in November, leading to the Central Government's efforts to contain consumer food prices. Food prices are believed to be a major contributor to the rising CPI before price controls kicked in.

Meanwhile, the steady rise in buy-up price PMI since July 2010 supports the view that the PPI stayed high at 4.8 percent in November compared with 5.0 percent in October, putting pressure on downstream sectors and possibly eroding profitability. While the mainland's current subsidy schemes may help ease food manufacturers' cost pressure, increasing commodity prices is likely to continue to hit downstream sectors. Given the inflationary pressure, the likelihood that the Central Government will raise interest rates before the end of 2010 is high.

Interest rate hikes are necessary to curb speculative activities. With government measures intended to control food prices now in place, food price inflation is expected to subside - at least temporarily - in December. However, an interest rate hike of 25 basis points by the People's Bank of China (PBoC) by year-end will still be necessary if current inflation trends persist.

Exports should have sustained strong momentum in November, with a growth rate of 21.9 percent year-on-year (all percentages are in YoY unless indicated otherwise) compared with 22.9 percent in October, on the back of the uptrend in new export order PMI. Import growth might have continued to moderate at 23.3 percent compared with 25.3 percent in October, partly due to seasonality. This could have resulted in a slide in net exports to $21.8 billion in November from $27.1 billion in October. The cumulative net export balance for 2010 would still be lower than that of 2009.

Meanwhile, growth in loans and M2 also remained strong in November, with the new loan volume estimated at 550 billion yuan and annual M2 growth at 19.0 percent. We believe the restrictive monetary measures introduced in mid-November were prompted by the recent surge in liquidity, both domestic and foreign.

The annual lending target of 7.5 trillion yuan for 2010 may have been surpassed, possibly triggering the unexpected tighter monetary measures implemented in mid-November by authorities.

In the consumption aspect, growth should also remain robust. Retail sales are estimated to have grown 18.3 percent in November, with the strengthening positive wealth effect and the negative interest rate environment serving as powerful tailwinds. Retail sales grew 18.6 percent in October. Strong domestic demand will continue to benefit the consumer discretionary and resources sectors.

Industrial output is expected to grow 13.0 percent in November, largely driven by robust domestic demand for consumer goods while growth in fixed-asset investment may see slight year-on-year improvement in the same month, translating to year-to-date growth of 24.5 percent.

The author is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.

(HK Edition 12/07/2010 page2)