July 1, 2008 / 6:25 AM / 11 years ago

UPDATE 2-Rising costs hit China's manufacturers - surveys

(Adds CLSA survey, details)

By Simon Rabinovitch and Zhou Xin

BEIJING, July 1 (Reuters) - Inflation is taking a toll on China’s businesses, as two manufacturing surveys show that input prices are rising and weighing on commercial activity.

The broader Chinese economy remained healthy but firms warned that they were passing rising costs on to consumers, which could hurt domestic demand, and struggling on export sales because of weak global markets.

The official purchasing managers’ index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to a nearly three-year low of 52.0 in June from 53.3 in May and 59.2 percent in April.

A reading over 50 indicates an expansion of activity, while one below 50 suggests contraction.

“Business is turning negative and this may undermine economic growth from the micro level,” said Zhang Liqun, an economist with the Development Research Centre, a think tank under China’s cabinet.

The measure for input prices paid by China’s manufacturers rose to its highest since the PMI survey was launched in 2005. Orders in both the domestic market and for export fell to their lowest since January.

Separately, brokerage CLSA published its PMI, showing that output prices rose at their fastest in four years as manufacturers shifted some of the rising cost of raw materials to the price tags seen by consumers.

CLSA’s PMI softened for the second straight month, dipping to 53.3 from 54.7 in May.

“The PMI shows a slowdown in orders and production in June. The question is how permanent this is. The businesses questioned suggested that it might be temporary,” said Eric Fishwick, CLSA’s head of economic research.

Firms laid the blame on lofty inflation, lingering disruption from May’s devastating earthquake and government measures to curb pollution before the Olympics.

SLOWING ECONOMY

The PMI indexes, which give a snapshot of business conditions for manufacturers, showed China faces a stiffening challenge as global economic woes and commodity price inflation wash onto its shores.

Zhang said seasonal factors may in part explain the worsening of business conditions, but that the underlying trend was a softening economy.

China’s growth rate is likely to drop to 10.3 percent in 2008 from 11.9 percent last year, Fan Jianping, an economist in a think tank under the country’s central planning agency, said in published comments on Tuesday.

He also said that, barring any further natural disasters, China would clock consumer inflation of about 7 percent this year, well above the government’s target for an average of 4.8 percent.

Evidence about exporters from CLSA’s survey was mixed. Orders from abroad expanded at their fastest since January but the pace of foreign sales was much slower, with firms pointing a finger at unfavourable exchange rate movements.

Premier Wen Jiabao on Monday urged the United States to stabilise the dollar, which many economists also say has fed into global inflationary pressures.

Rising prices and the patchy supply of raw materials were chief among the complaints of manufacturers surveyed in the official PMI.

China has held down the cost of energy, from fuel to electricity, resulting in shortfalls as refiners and power companies rack up huge losses and cut their output.

Beijing’s decision to raise fuel prices by nearly 20 percent last month was meant to alleviate shortages, though prices remain well below global levels as the government still tries to cushion manufacturers’ bottom lines. Following is a breakdown of the official purchasing managers’ index:

Jun May Apr Mar Feb Jan Overall PMI 52.0 53.3 59.2 58.4 53.4 53.0 Output 54.2 55.7 66.5 64.1 55.4 56.1 New orders 52.6 55.4 65.0 63.8 56.9 55.2 New export orders 50.2 53.4 58.9 59.1 51.3 49.0 Backlogs of orders 47.1 49.3 53.4 54.6 50.9 48.6 Stocks of finished goods 49.5 48.7 47.2 47.3 47.3 48.4 Quantity of purchases 53.5 53.7 64.6 64.0 54.6 56.9 Imports 50.9 50.3 56.1 57.5 50.7 51.3 Input prices 75.7 73.9 75.1 74.6 70.1 67.7 Stocks of purchases 47.8 48.1 51.2 50.8 45.1 49.2 Employment 50.3 51.2 52.9 53.4 49.8 49.7 Suppliers’ delivery times 47.8 48.8 51.0 50.5 46.5 49.7

(Editing by Jacqueline Wong)

((simon.rabinovitch@thomsonreuters.com; +86 139 0111 6692; Reuters Messaging: simon.rabinovitch.reuters.com@reuters.net)) Keywords: CHINA ECONOMY/MANUFACTURING

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