RPT-WRAPUP 1-China factory inflation eases, yuan hits record

(Repeats to fix link to PMI graphic)

* HSBC Dec PMI dips but still strong, cost inflation slows

* Senior c.banker says yuan rise helps curb inflation

* C.bank lets yuan hit a record high vs dollar

* Economist warns inflation could still hit double-digits

By Kevin Yao and Chen Aizhu

BEIJING, Dec 30 (BestGrowthStock) – Chinese inflation showed signs
of cresting in a manufacturing survey on Thursday, an early
indication that the government will be able to stick to its
course of gradual rather than aggressive monetary tightening.

An easing of price pressures could also cap this week’s
jump in the yuan to a record high against the dollar, which
the central bank said had played an important role in taming
inflation.

HSBC’s China Purchasing Mangers’ Index fell to a three
month-low of 54.4 in December from 55.3 in November,
suggesting that the pace of business expansion in the
factories of the world’s second-largest economy was moderating
but still strong.

The headline figure offers an early clue about the
direction of overall economic growth, but all eyes now are on
Chinese inflation, which is running at its fastest in more
than two years, and Beijing’s policy response to price
pressures.

In that arena, the HSBC survey offered a modicum of relief.

The input cost sub-index fell to a three-month low of 72.3
from 80.8 in November, while the output cost sub-index edged
down to a four-month low. But both figures were still well in
expansionary territory, indicating that firms were passing
higher raw material costs onto their customers rather than
absorbing them and taking a hit on earnings.

“Inflation rather than growth still remains the top policy
concern, despite the moderation in December’s manufacturing
PMI reading,” said Qu Hongbin, HSBC’s chief economist for China.

“We expect Beijing to continue to rely on quantitative
tightening measures to curb inflation and counter the impact
of QE2 (U.S. monetary easing), while modest interest rate
hikes are also needed to anchor inflation expectations in the
coming months.”

The People’s Bank of China raised benchmark interest rates
on Saturday for the second time in just over two months.
Analysts polled by Reuters expect it to raise rates twice more
in the first half of 2011. [ID:nL3E6ND0QB]

Consumer price inflation raced to a 28-month high of 5.1
percent in the year to November.

STRONGER YUAN

The yuan rose to a record of 6.613 against the dollar on
Thursday after a senior official from the central bank said
gradual appreciation would help curb inflation and rebalance
the economy.

China will continue to push forward reform of the exchange
rate mechanism, Sheng Songcheng, head of the central bank’s
statistics department, told the Financial News, an official
newspaper.

“The positive impacts of China’s yuan reform on the
domestic economy have significantly outweighed negative
impacts,” Sheng said. [ID:nTOE6BT004]

The yuan has gained just over 3 percent since
its depegging from the dollar in June. But in the past two
weeks alone, it has jumped 1 percent and traders think it is
set for a new leg of measured gains.

The appreciation of the past half year had dragged down
domestic inflation by around one percentage point, Sheng said.

He also said a survey of 5,000 manufacturers and 2,100
exporters had found that a stronger yuan was essential to
rebalancing the economy toward greater reliance on domestic
demand, a top objective of China’s leaders.

“If we allow the yuan to appreciate 3 percent a year
against the dollar, it can boost imports by 0.3 percent,
reduce exports by 0.6 percent and cut the trade surplus by 6
percent,” he said.

HAWKISH CENTRAL BANK

An informal poll of China-based dealers over the last week
showed that many expect the yuan to gain roughly 6 percent
next year, hitting 6.25 per dollar in late 2011, as the
exchange rate plays an increasing role in the battle against
inflation. [ID:nTOE6BQ01Y]

The central bank is more hawkish than other state agencies
on inflation, but it lacks policy independence when it comes
to key decisions on interest rates and the yuan.

If inflation is indeed nearing a peak, then the central
bank’s push for heftier appreciation could soon run out of
steam.

Nevertheless, Gao Shanwen, chief economist at China
Essence Securities, warned that inflation could come unhinged
next year if growth takes off.

“Inflation has hit 5 percent even though the economy is not
overheating. We can imagine that inflation could easily shoot
up to double-digits in a short span of time once China’s
economy becomes overheated,” Gao was cited as saying by local
media.

China will report its official PMI for December on
Saturday, Jan 1.

Economists polled by Reuters forecast that it rose to a
median 55.5, an eight-month high, underlining that the
country’s manufacturing sector is in robust shape.
[ID:nTOE6BS025]
(Writing by Simon Rabinovitch; Editing by Kim Coghill)

RPT-WRAPUP 1-China factory inflation eases, yuan hits record