China Manufacturing Data Could Presage a Rising Yuan

Manufacturing activity in China and much of Asia continued to expand in March, underscoring the region's role as a driving force in the global economic recovery.

China's official Purchasing Managers' Index (PMI) rose to a seasonally adjusted 55.1 from 52 in February, according to Li & Fung Group, a Hong Kong-based company that releases data for the Federation of Logistics and Purchasing.  It marked the 13th straight month the index showed expansion and was in line with the median estimate in a Bloomberg News survey of 13 economists. A reading above 50 indicates growth.

Another PMI for China released by HSBC Holdings PLC (NYSE ADR: HBC) was even more positive, showing a rise to 57.0 in March from 55.8 in February.

HSBC's manufacturing index for Taiwan showed activity there continuing to expand strongly as well. Additional data from South Korea and Australia also showed manufacturing activity growing in March, but more slowly than in February.

While the numbers were generally seen as evidence that China and other Asian countries are strong enough to spur the global economic recovery, they also added to calls for the winding down of stimulus measures that policymakers say may be contributing to asset-bubble risks.

"Risks of overheating are still building despite the government's cooling measures, as the PMI has stayed above 55 over the past five months excluding February, when production was disrupted by the Chinese New-Year holiday," Xing Ziqiang, a Beijing-based economist at China International Capital Corp. told Bloomberg. 

"With inflation pressures rapidly accumulating, this increases the risk of interest rate hikes in the coming months," HSBC Chief Economist for China Hongbin Qu said in a statement.

The acceleration may also force Premier Wen Jiabao's government to consider allowing the Chinese yuan to gain value for the first time since mid-2008, and raise interest rates. Central bank governor Zhou Xiaochuan said last month that "sooner or later" China will end the contingency measures it adopted during the global recession.

Wen has repeatedly rejected calls to let the yuan appreciate.

"I don't think the renminbi is undervalued," Wen recently said at a press conference in Beijing, using the Chinese currency's official name.

But the growth in regional manufacturing – together with a surge in crude oil prices to their highest level in 17 months – suggests that inflation could again become a problem.

A stronger currency would help contain inflation by reducing the cost of imports. Consumer prices rose 2.7% from a year earlier in February, the biggest increase in 16 months, and the government aims to keep the pace of gains below 3% this year.

Xing expects the government will let the yuan appreciate as early as this month and raise rates in June.

The Chinese data indicate that the current upswing in Asia's export cycle may be further extended, Sanjay Mathur, head of Asia ex-Japan economics at Royal Bank of Scotland Group PLC (NYSE ADR: RBS) told The Journal.

"Exports will hold up," Mathur said. "In previous readings they were starting to suggest that the momentum of growth is slowing, but clearly that is not happening."

Given China's role as an assembly hub for regional intermediate products, its strong manufacturing data is especially positive for Malaysia, Korea, Hong Kong and Taiwan, he added.

The Institute for Supply Management released figures showing that U.S manufacturing grew in March at the fastest pace in more than five years, raising hopes that the global economy has embarked on a prolonged economic expansion.

"Manufacturing is on a tear," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. (NYSE ADR: MTU) in New York told Bloomberg.  It's "turning this recovery into a more sustainable one. As production increases, it means job gains are going to spread."

News & Related Story Links:

• Bloomberg:
  China Manufacturing Expanded at Faster Pace in March
• Wall Street Journal:
  China, Asia Manufacturing Grows
• Money Morning:
  Chinese Premier Wen Rejects U.S. & European Pleas, Says Yuan to Stay Stable
  
• Bloomberg:
  U.S. Economy: Manufacturing Jumps in Sign of Sustained Rebound
• Money Morning:
  U.S. China Currency Dispute Heating Up