Hong Kong's private sector activity slowed to a three-month low in February albeit expanding for a 19th consecutive month, according to a purchasing managers survey by HSBC released on Thursday.

The HSBC Hong Kong Purchasing Managers Index (PMI) retreated to 53.7 in February from January's nine-month high of 55.2. A reading above a threshold of 50 indicates expansion.

"Like the mainland and other Asian markets that enjoyed a Chinese New Year break, Hong Kong's PMI took a slight breather in February too," said Donna Kwok, Greater China economist at HSBC.

New order intakes continued to rise from January but at a relatively slower pace due to a weaker increase in new orders from the mainland, which can be traced to distortions associated with the Chinese New Year holidays and the impact of Beijing's recent monetary tightening and fiscal stimulus withdrawal, the report said.

The new orders index fell to 54.1 in February from 58.1 in January and the index for mainland orders eased to 51.3 from 53.6.

Subsequently, the output index eased to 54.9 in February, versus 57.8 previously.

Despite the slowdown in new order intakes, respondents continued to report tightness of productive capacity, with backlogs of work building up for the seventh straight month, which could have contributed to wage growth and a second straight month of positive job creation.

Private sector employment increased in February, with the rate of job creation quickening since January to the fastest pace in 10 months. The employment index jumped to 52.6 in February from 51.1 in January.

"Job creation and wage growth continued unabated, which bodes well for retail sales and ultimately our bullish call for Hong Kong's economy to expand 5.2 percent in 2011," said Kwok.

In the mean time, on the inflation front, the pass-through of spiraling input costs into output prices continued to pick up pace. Both the input and output cost sub-indices increased markedly in February, hitting 67 and 57.2, respectively, against 71.1 and 56.1 previously.

Rising wages and raw materials costs as well as unfavorable exchange rate movements all fuelled input cost inflation, coaxing more businesses to pass on the cost burden to consumers, which in turn sent the charged prices sub-index to a level well above its long-run average.

That said, wage inflation doesn't have to be all bad. Respondents attributed above-trend wage growth to the strength of recent company performance. In other words, strong growth is enhancing businesses' ability and willingness to pass on higher input costs to consumers, the report said.

Taking the differential between the output and input cost sub-indices as a proxy for corporate profitability, it can be argued that margins for businesses improved again for the second consecutive month in February.

"Hong Kong's private sector continues to expand at a solid pace, despite softer mainland demand," said Kwok, commenting on the latest PMI figures.

Going forward, a brightening US manufacturing outlook should help to counter the impact of cooler - but still elevated - levels of mainland growth, she added.

China Daily

(HK Edition 03/04/2011 page2)