HONG KONG: China's factories cranked up production in December on the muscle of bulging order books, but strong demand also pushed prices higher and raised the specter of inflation, according to a manufacturing survey.

The HSBC purchasing manager index (PMI) rose to 56.1 in December, up from 55.7 a month earlier. The index reached its highest level since the survey began in April 2004. A reading above the watershed mark of 50 indicates an expansion of manufacturing activity.

The increase in production capped a remarkable turnaround for Chinese factories, with the PMI averaging its highest quarterly reading in survey history in the final three months of 2009. A year earlier, the index had plumbed a record low.

The findings were largely consistent with China's official PMI, released on January 1, which surged to a 20-month high in December. But the government's success in wrenching the economy back into gear is sowing new worries about inflation.

Chinese manufacturers raised prices at the fastest rate in 17 months in December, according to the PMI.

Companies said inflationary pressure came from a combination of buoyant market demand and rising raw material prices, particularly for steel.

The PMI offered good news about exports and jobs.

New export orders, which rose throughout the second half of 2009, surged to their fastest growth in nearly five years - a marked contrast to steep falls at the end of 2008.

Factories, looking to satisfy the strong demand, created jobs at the third-fastest rate in survey history in December, albeit down from a record two months earlier.

China Daily/ Reuters

(HK Edition 01/05/2010 page6)