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China's manufacturing hits 20-month high Add to ...

China's manufacturing sector steamed ahead in December as strong rises in new orders and output drove a key economic survey to a 20-month high.

The official purchasing managers' index (PMI) jumped to 56.6 in December from 55.2 in the previous month, the China Federation of Logistics and Purchasing (CFLP) said on Friday.

It was the tenth straight month that the index has stood above the watershed mark of 50, indicating an expansion of activity.

As the biggest month-on-month rise since March, it also suggested that the Chinese manufacturing sector, far from plateauing after its recovery, has actually gathered momentum.

"December's PMI reading suggests sustained expansion in industrial activity," Jing Ulrich, chairman of China equities at J.P. Morgan, said in a research note. "The forward-looking components of PMI indicate continued expansion in both domestic and external demand."

But a slower expansion of new export orders for the second straight month may offer pause to officials who have been extremely cautious in winding down loose, pro-growth policies, believing that domestic stimulus is still needed to counteract sluggish external demand.

"The fall in the indicator for new export orders warrants attention, as it shows we must avoid undue optimism about the improvement in the international marketplace," said Zhang Liqun, a researcher at the State Council's Development Research Centre who comments on the PMI for the logistics federation.

Another mildly discordant note among the otherwise rosy survey was the reading for input prices, which climbed to a 17-month high of 66.7 in December, up from 63.4 in November.

"The input price rise shows that the production cost of enterprises are climbing. Enterprises should work to increase their capability to withstand rising costs," Zhang said.

Worries about price rises have emerged again in China after deflation for much of 2009, with top leaders saying that controlling inflationary expectations will be one of their priorities this year.

The dominant theme of the PMI, though, was the broadening strength of China's recovery. Seventeen of 20 industries surveyed reported an expansion in activity, with metal products the strongest and tobacco at the low end.

China's economy shot back to nearly double-digit growth in 2009 after nearly standing still at the end of 2008, giving a lift to Asia and countries that have been able to feed its voracious appetite for commodities.

An unexpected surge in South Korean exports in December was the latest evidence of how economies that are intertwined with China have benefited.

China's PMI also showed that the country's job market has continued to improve. The employment sub-index hit 52.2 in December, up from 51.1 in the previous month, as 12 of 20 industries reported increases in hiring.

Many analysts believe that two crucial preconditions for China to begin tightening policy more aggressively are a recovery in employment and a sustained increase in exports.

At the height of the global financial crisis, China's central planners worried the country would be unable to reach the 8 per cent growth deemed necessary to maintain employment and avert social instability.

The country's 4 trillion yuan stimulus package, complemented by a record surge in bank lending, propelled the economy to 8.9 per cent year-on-year growth in the third quarter of 2009 and put it on track for even faster expansion this year.

"We expect China's strong economic growth momentum to continue in 2010, with the major source of growth coming from a broad-based improvement in private consumption, and further strengthening in private housing investment, and a solid recovery in exports," Ulrich said.

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