China's economy continues to rocket ahead, showing evidence of new strength in manufacturing and domestic consumption and easing fears that slower growth there could hamper the global recovery.
Manufacturing in China surged at the fastest pace in six months in October after contracting briefly earlier this year and raising fears the engine of the global recovery was faltering.
China's official Purchasing Managers Index (PMI) increased to 54.7 in October from 53.8 a month earlier, the China Federation of Logistics and Purchasing said Monday. A PMI reading above 50 indicates expansion, while a reading below 50 signals contraction.
A China PMI index produced by HSBC Holdings plc (NYSE ADR: HBC) jumped to 54.8 from 52.9, one of the largest one-month rises since the bank started tracking it in 2004.
The strong report also showed that China is increasing domestic consumption and is increasingly insulated from the struggle in the world's advanced economies to recover from the Great Recession.
But it also raises the specter of overheating and the possibility of further measures to contain inflation.
"Economic activities remained strong, while inflation pressures continued to mount," Liu Li-Gang, a Hong Kong- based economist at Australia & New Zealand Banking Group Ltd. told Bloomberg News. "Inflation is far from peaking, which could invite another interest-rate hike by December."
The country's central bank lifted rates last week by 0.25 percentage points for the first time since 2007 to further cool the risk of overheating.
China released data last week showing its economy grew 9.6% in the third quarter from a year earlier, slower than years past but still significantly ahead of other countries that are struggling to stabilize their economies.
A slight dip in growth is what China wanted. Its gross domestic product (GDP) has grown on average more than 10% annually since 2006.
An index of input prices jumped to 69.9 in October from 65.3 in September. New orders for manufactured goods are exploding, bolstered by domestic purchases, most notably the construction of welfare homes and accelerated work on stimulus projects, the logistics federation said.
By contrast, an index of new export orders dipped to 52.6 from 52.8, Bloomberg reported.
"If anything, the engine of growth is speeding up and running faster than people were expecting," Glenn Maguire, Société Générale's chief economist for Asia-Pacific told The Wall Street Journal. "It's certainly not stalling."
But the region's other economies may not be able to rely on China's expansion to feed their growth as internal consumption increases and their own currencies rise, hurting exports.
Maguire said China's strength should have a positive effect throughout the region but warned the carryover might not be as strong as in the past due to the increase in domestic consumption.
"The last upswing we saw in PMIs, in 2009, was largely driven by production due to China's massive infrastructure and investment package: The strong pickup in China PMIs corresponded nicely with strong exports from Australia, Taiwan, South Korea, Brazil—economies leveraged off the China growth model," Maguire said. "The recovery now is perhaps being driven more by developments that have been sourced domestically, so there's not the same call on the rest of Asia."
Indeed, new manufacturing orders continued to slow in other export-driven economies in the region. In Taiwan, the HSBC PMI dropped to 48.6 from 49.0, the third-straight contraction, the Journal reported.
South Korea's PMI fell to 46.75 from 48.81, declining for a sixth-straight month.
"The global-restocking bounce has finally come to an end, and Korea is feeling the chill," Song Yi Kim, an economist at HSBC Asia, said in a statement. "Already grappling with falling output prices, especially in tech products, Korean exporters have also seen a slump in their orders amid fading demand overseas. This will weigh on economic activity in the fourth quarter."
Even resource-rich Australia is experiencing the slowdown. Australian manufacturing also contracted in October, hurt by labor shortages and a strong currency.
"Manufacturers continue to be inhibited by strong overseas competition amid the strengthening Australian dollar, soft domestic demand and an intensification of skill shortages," Australian Industry Group Chief Executive Heather Ridout told the Journal.
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