A laborer in a textile factory in Yiwu, in China's Zhejiang province, Tuesday. China's manufacturing activity grew in December, but at a slower pace.
Growth in Chinese manufacturing activity slowed in December for the first time since July, an industry survey showed, but the reading remained relatively strong and analysts predicted further inflation-fighting measures from the government like interest-rate increases and currency appreciation.
The HSBC China Manufacturing Purchasing Managers Index, a monthly gauge based on a survey of executives, also showed that prices for factory inputs rose in December at their slowest rate in three months. While analysts caution against making too much of a single survey, the readings could indicate that a series of rate increases and other measures aimed at taming inflation are having some impact.
The HSBC purchasing managers index for December fell to 54.4, from 55.3 in November. A reading above 50 indicates expansion from the previous month, while one below 50 indicates contraction.
Thursday's manufacturing data came as the Chinese currency rose to a fresh high against the dollar for a third straight day??appreciation that appears driven partly by official concern over inflation??and a central bank official argued for the currency to rise further. The yuan, which ended over-the-counter trading in Shanghai at 6.6008 per dollar Thursday, has risen more than 1% in less than two weeks, after falling for much of the previous month. It has gained 3.4% since China ended an effective dollar peg in June.
Many analysts have been expecting China to let the yuan rise faster ahead of Chinese President Hu Jintao's planned state visit to Washington on Jan. 19, to ease tension over the thorniest trade issue between the two countries. U.S. officials say China keeps the yuan down to give its exports an unfair edge by making them artificially cheap in dollar terms.
But the yuan's recent strength also comes as officials have grown increasingly concerned about consumer-price inflation, which hit its fastest pace in November since July 2008. On Sunday, the People's Bank of China raised interest rates for the second time in 10 weeks, and the government has sought to curb bank lending and cap prices of certain commodities.
A stronger yuan reduces the prices of imported goods in local currency terms, and eEconomists have argued that China will likely allow continued, if gradual, appreciation to help contain prices. In a research note Thursday, economists at Royal Bank of Canada predicted the yuan will strengthen to 6.2 per dollar in 2011, meaning a gain of more than 6% from the current level.
Chinese policy makers have been divided over how quickly the yuan should rise, with some emphasizing the potential damage a stronger currency could cause exporters. The Ministry of Commerce on Thursday reiterated that point, saying in a statement that exporters face complex challenges in 2011, including exchange-rate changes.
But in an unusual commentary on Thursday arguing the other sid, a central bank official wrote that a small, gradual appreciation in the yuan presents more benefits to the Chinese economy than costs. In a commentary in the Financial News, a newspaper published by the central bank, Sheng Songcheng, director of the People's Bank of China's statistics and analysis department, said the yuan's rise since June has had only a small impact on employment and growth.
Mr. Sheng argued that by focusing on exporters' profit margins, some in China have "overestimated the possible negative effect of yuan reform and underestimated companies' capability to flexibly cope with the changes." He said that appreciation benefits the Chinese economy by pushing exporters to become more efficient and competitive.
In a statement more typically made by U.S. officials than their Chinese counterparts, Mr. Sheng also said appreciation can help improve the balance of trade and international payments, reducing the pressure on China to continue accumulating excess foreign-exchange reserves. He cited central bank estimates that the yuan's rise in 2010 will increase imports by 0.3% and reduce exports by 0.6%, resulting in a 6% reduction in the trade surplus. He also noted the value of the yuan's gradual rise in reducing inflation pressures, which he said is the major problem for the Chinese economy currently. He predicted that China's consumer-price index will rise around 4.5% in 2011, from an expected 3.3% in 2010.
The HSBC purchasing managers index for December fell to 54.4, from 55.3 in November. A reading above 50 indicates expansion from the previous month, while one below 50 indicates contraction. The December reading was its lowest level since September, and the first decline in five months, but it still marked a robust level of activity.
HSBC said rises in prices that factories paid for their inputs and charged for their products slowed in December, but that indicators for both categories continue to show inflation pressures.
"Inflation rather than growth still remains as the top policy concern, despite the moderation in December's manufacturing PMI reading," Hongbin Qu, HSBC's China economist, said in a statement.
Separately, China detailed plans to make state-owned companies turn over more of their profits to the government, part of a push to get the powerful state sector to fund more social spending.
The Ministry of Finance said it will increase the number of firms owned by the central government that are required to pay dividends, and raise the payout ratios for those most state enterprises that are already in the dividend program. The change will raise the ratio by five percentage points for most firms, to a maximum of 15%.
In 2009, the companies owned by the central government's state-owned Assets Supervision and Administration Commission had total profits of 815.1 billion yuan, or about $123 billion. Officials have said the 2010 figure will exceed one trillion yuan. That doesn't include China's giant state banks, which are controlled by other arms of the government, or profit from firms owned by local governments.
State-owned companies have faced growing callsto pay more of their earnings to the government to help fund much-needed increases in social welfare spending. In 2007, the government launched a trial dividend program, but it was widely criticized as having limited impact. It brought in 157.22 bllion yuan from 2007 to 2009, or less than 1% of total government revenue.
