Busy China and India factories keep inflation aloft

By Jason George and Koh Gui Qing

BEIJING/BANGALORE (Reuters) - Factories in China and India bumped up production in March as manufacturers drew in more new orders, keeping price pressures intact and making further monetary tightening necessary.

Surveys of manufacturers in Asia's economic giants showed worries that high oil prices could scupper growth were unfounded for now, even though China's outlook was clouded by signs of disruptions to trade with crisis-stricken Japan.

In China, a pair of purchasing managers' indexes (PMI) showed factories were growing moderately rather than booming, and some economists said a further slowdown could be in store.

Yet few thought slackening production would slam the brakes on the world's fastest-growing major economy. Instead, they said it showed China was scoring some success in taming prices with its gradual monetary policy tightening.

"It's growing at a slow and steady speed as tighter monetary policy impacts," said Stephen Green, an economist at Standard Chartered in Shanghai.

"I'm not overly worried about growth. We need to hit inflation. That is the priority still," he said.

China's official purchasing managers' index (PMI), compiled by the government, rose to 53.4 in March from a six-month low of 52.2, slightly under a Reuters forecast for 54.

A separate survey published by HSBC showed the PMI steadying near seven-month lows at 51.8, from February's 51.7.

In India, the mood among manufacturers was more upbeat.

A survey by HSBC of around 500 firms showed the PMI held steady at a four-month high of 57.9 in March from February.

"Growth is not an immediate concern," Leif Eskesen, HSBC's chief economist for India & ASEAN said in reference to India.


In China, while factory costs were shown to be rising at a slower pace, prices were climbing nonetheless.

The input prices sub-index, a measure of how much factories pay for raw materials and other intermediary goods, eased to 68.3 in March for the official PMI, from February's 70.1.

The HSBC survey showed factory inflation cooling to seven-month lows of 67.5, well down from 74.6 a month earlier. Yet the readings in both surveys remained well above the 50 point no-change level, showing costs were still climbing at a brisk pace.

Although the results hold out hope that Beijing is gaining a handle on inflation, it did not dispel expectations that China was not done yet with policy tightening.

Most analysts expect China to raise interest rates at least once more this year, by 25 basis points. A government researcher said on Friday the rate rise could happen as soon as this month.

"Quantitative tightening is working. So as long as Beijing keeps tightening for another three to four months, inflation should start to slow meaningfully in the second half of 2011," said Qu Hongbin, HSBC's chief economist in China.

High oil prices and excess cash in the Chinese economy drove China's inflation to a 28-month high of 5.1 percent in November. Although it has since abated, many analysts expect prices to climb again in coming months.

In India, price pressures appeared to be more stubborn, despite eight interest rate increases in the past year.

The HSBC survey showed the input price index in March was at its highest since the poll was started in April 2005, driven by surging raw material and crude oil prices.

Economists fear supply bottlenecks and further gains in oil prices could push India's inflation further up from an annual reading of 8.3 percent in February.

"Manufacturers are facing ever steeper increases in input costs due to tight labor markets and rising material costs, which are increasingly being passed on to output prices," Eskesen said.

"This calls for further tightening of monetary policy to tame inflation pressures," he said.

India's central bank holds its next policy meeting on May 3.


Signs that Chinese manufacturers are feeling a pinch from their trade with Japan complicates the outlook for the world's second-largest economy.

For the first time, China said Japan's earthquake and nuclear disasters were starting to affect production. It said the electronics industry was feeling the squeeze of reduced supplies of parts and raw materials.

Analysts said that since Japan's outlook is still shrouded in uncertainty, it was hard to gauge the impact on China's factories.

"The length of (supply) disruption is important. Each component has an inventory and some components have alternative supplies," said Dong Tao, an economist at Credit Suisse in Hong Kong. "Maybe you will have to buy at a higher price but it's not like all the suppliers have disappeared."

In the first two months of the year, China bought $29.1 billion worth of goods from Japan. Data showed electronics and machinery parts accounted for 48 percent of these imports.

Electronics and machinery parts in turn make up 58 percent of all Chinese exports.

(Additional reporting by Aileen Wang; Editing by Ken Wills and Tomasz Janowski)