Manufacturing activity in China fell to a three-month low in December but soaring raw material costs continued to fan inflationary pressures in the economy, an independent survey said today.
The HSBC China Manufacturing PMI, or purchasing managers' index, slipped to 54.4 in December from 55.3 in November as output and new business increased at the slowest pace in three months, the banking giant said.
But manufacturing activity in the fourth quarter, as a whole, was the strongest since the first three months of the year, it said. A reading above 50 indicates the sector is expanding, while a reading below indicates contraction.
The data came as the yuan reached the strongest level against the dollar since Beijing vowed in June to loosen exchange rate controls, which a central bank official said today helps cut import costs and curb inflation.
The People's Bank of China set the yuan central parity rate - the middle of the currency's allowed trading band - at 6.6229 to the dollar, meaning it has appreciated about 3% against the greenback since June 19.
Despite the gains in the yuan, average input prices rose for the fifth month in a row, albeit at the slowest pace in three months, driven mainly by soaring raw material, energy and fuel costs, the HSBC survey showed.
Chinese purchasing managers said their factories were passing on the higher costs to customers by hiking factory-gate prices for products, highlighting the need for further monetary tightening measures, HSBC chief economist Qu Hongbin said.
'Inflation rather than growth still remains as the top policy concern, despite the moderation in December's manufacturing PMI reading,' Qu said.
'We expect Beijing to continue relying on quantitative tightening measures to curb inflation, while modest interest rate hikes are also needed to anchor inflation expectations in the coming months,' he added.
Chinese leaders, mindful of inflation's potential to spark unrest, have been pulling on a variety of policy levers to rein in consumer prices, which rose more than 5% in November for the first time in more than two years.
On Saturday, the central bank hiked interest rates for the second time in less than three months after ordering state-owned banks to keep more money in reserve as they try to stem the flood of liquidity into the economy.
Analysts have blamed Beijing's four trillion yuan ($586 billion) stimulus spending over the past two years and excessive bank lending for fuelling inflation.
