International | Sep 01 2006
By Rudi Filapek-Vandyck
China remains a basket full of wonders and contradictions. The latest update on manufacturing in the country by CLSA is certainly no exception. Within 48 hours after a Chinese government official declared inflation may become a problem, CLSA reports input and output price inflation has slowed down markedly in August.
The negative news is that at the same time the number of respondents reporting higher new export
orders has dropped to the lowest level since the survey began in April 2004. CLSA expects much more weakness over the coming year as the US economy is expected to slow sharply.
CLSA Chief economist Jim Walker says that anticipated lower US export orders combined with profit pressures will make it difficult for the current solid expansion in Chinese manufacturing to continue much longer. He believes tighter monetary policy could not be coming at a worse time. Although current growth conditions remain robust the outlook for Chinese growth is clearly deteriorating, Walker says.
Another interesting observation made by CLSA is that the expansion in the manufacturing sector remains solid although far from reflective of the breakneck pace of Chinese GDP growth. According to CLSA, this would suggests most of the reacceleration in the Chinese economy in 2006 has come in the real estate and infrastructure sectors. As it happens, government efforts to slow down economic growth are concentrated on these areas. CLSA believes this should also bring relief to the cost pressures bearing down on manufacturing sector profitability.
The August survey revealed Chinese manufacturing production increased for a ninth month in succession but the rate of output growth eased to a five-month low. In addition, expansion of new business was the least marked in five months. CLSA believes this reflects a slight softening of demand from both domestic and export clients.
CLSA reports August’s data indicated a further marked increase in firms’ input costs, with oil, aluminium, copper and chemicals reported to have risen in price since July. The rate of input price inflation eased to a four-month low, although CSLA would still describe it as “sharp”. Output prices also increased at their slowest rate in four months. CLSA reports a number of companies cited a lack of pricing power amid strong competition.
