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Asia Economy Last Updated: Dec 30, 2010 - 11:17 AM


China's manufacturing activity fell to a three-month low in December; Japanese manufacturing contracted for fourth straight month but at slower pace
By Finfacts Team
Dec 30, 2010 - 11:11 AM

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Source: Markit

China's manufacturing activity fell to a three-month low in December but rising raw material costs raised inflationary pressures according to a report on Thursday. Meanwhile Japanese manufacturing activity contracted for a fourth straight month in December but the rate of deterioration was the slowest in three months.

China: December data pointed to a continued improvement of Chinese manufacturing sector operating conditions. However, overall growth of the sector lost momentum, with both output and new business rising at the slowest rates in three months. The slowdown in new order growth was insufficient to prevent a further rise in backlogs of work, which in turn prompted firms to hire additional staff on average. Considering inflation, firms continued to pass on sharply rising input costs to clients through increased output charges.

The headline seasonally adjusted HSBC Purchasing’ Managers Index (PMI) fell to a three-month low of 54.4 in December, from 55.3 in November. Nonetheless, for Q4 as a whole, overall growth of the sector was the strongest since Q1 2010.

Manufacturing output increased steeply in December, albeit at the slowest rate in three months. Where a rise in output was signalled, panellists often linked growth to continued new business wins. The rate of expansion in new work eased since November, but remained strong in the context of historical data. Growth of new work was supported by strong underlying demand. However, data suggested that overall growth centred on the domestic market, with new export business increasing at a much slower rate than total new orders. Indeed, the rate of expansion in new export orders was only modest.

Outstanding business continued to rise in December, although the rate of growth eased since November. Further backlog accumulation predominantly reflected greater inflows of new business and, as a result, growing pressure on manufacturers’ operating capacity. Consequently, firms added to their staff numbers in December, with the rate of job creation quickening to the fastest since June.

Average input prices rose further in December. Although still substantial, the rate of input cost inflation eased to the slowest in three months. Higher raw material prices continued to drive inflation in the latest survey period, with basic metals mentioned in particular. Consequently, firms continued to pass on higher costs to clients through increased output charges. Similar to the trend in input prices, the rate of output price inflation eased since November, but remained much stronger than the long-run trend.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:  "Inflation rather than growth still remains as the top policy concern, despite the moderation in December’s manufacturing PMI reading. We expect Beijing to continue to relying on quantitative tightening measures to curb inflation and counter the impact of QE2, while modest interest rate hikes are also needed to anchor inflation expectations in the coming months."

The HSBC China Report on Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 manufacturing companies.

Source: Markit

Japan: December data pointed to another deterioration in Japanese manufacturing sector operating conditions, although the rate of contraction eased to the weakest in three months. This primarily reflected slower declines in output, total new business and employment. On the prices front, input cost inflation quickened to the fastest since May. However, output prices continued to fall amid strong competition for new work.

Manufacturing output in Japan fell further in December, albeit at the slowest rate in the three months of continuous decline. Where a fall in output was signalled, respondents widely attributed this to falling new business.

Overall new work fell solidly in December, as panellists continued to report underlying demand weakness. However, the pace of reduction eased to the slowest since September. In contrast, the rate of decline in new export business quickened to the fastest in twenty months. Anecdotal evidence suggested that reduced export sales reflected sluggish demand from external sources.

Spare capacity remained evident in December, with backlogs of work falling for the sixth month in succession. As a result, firms continued to reduce staff levels, albeit at only a marginal rate. Lower personnel numbers reflected employee retirements.

Slower lead times were signalled in the latest survey period, with panellists attributing this to supply shortages at vendors. However, the rate at which supplier performance deteriorated was only slight, as firms continued to reduce their purchasing in line with falling production requirements. That said, the rate of decline in buying activity eased since November.

Average input costs faced by Japanese manufacturing firms rose markedly in December, with the rate of inflation quickening to a seven-month high. Even so, the latest increase was slower than the long-run series average. Panellists cited higher raw material prices as the key driver of inflation, with cotton, petroleum, rare metals and steel mentioned in particular.

Despite a sustained rise in input costs, manufacturers continued to reduce their output prices in December. This primarily reflected strong competition for new business. There were also reports of client requests for lower prices. The latest decrease stretches the current period of decline to more than two years.

Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report said:  "Japan’s manufacturing sector continued to contract in December, bringing to a close a year of mixed fortunes. Output grew robustly in H1 2010 before losing steam and contracting towards year-end. Manufacturers remained hesitant with regards to hiring, as underlying demand weakness and spare capacity persisted in December. On the prices front, robust cost inflation, coupled with continued output price discounting, will likely place added pressure on firms’ operating margins heading into 2011."

The Markit/JMMA Japan Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 industrial companies.

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