The pick up in the input cost index and uncertain commodity prices suggest pipeline inflationary pressures remain. China's NBS manufacturing PMI rose above the 50 threshold to 50.3 in December (BarCap and Bloomberg: 49.1), from 49 in November. After adjusting for seasonality (sa), the NBS PMI rebounded less to 49.9 vs 49.8 in November.

The HSBC PMI also increased, to 48.7 from 47.7, with the sa series rising to 48.9 from 48.7. The better-than-expected outturn mainly reflects holiday effects - strong demand and activity ahead of the Chinese New Year, which comes earlier in this year (23 January versus 3 February in 2011). The November RRR cut and targeted easing policies are also likely to have contributed. Given the timing of the Chinese New Year, we expect the January NBS PMI to post a m/m decline.   
 
Overall, we think the December leading indicators suggest still resilient domestic demand and some stabilisation of industrial activity, albeit at a low level into Q1 2012. With property market activity and export growth expected to slow further, we maintain our view that growth will moderate further, with the pace of slowdown steady and broadly in line with our baseline expectation of a soft-landing. We expect to see further weakness in industrial activity before more easing policies are rolled out, and expect sequential growth momentum to bottom in Q1.    
 
Details show that the NBS PMI sub-indices mostly stayed below the 50-threshhold while posting some rebound (Figure 3). The PMI new orders index rose to 49.8 from 47.8 in November, pointing to resilient domestic demand as well as some recovery in external demand. The export orders index rose to 48.6 from 45.6 last month, but both are still in contraction territory (Figure 4). The bright spot was the significant pick up in the production index to 53.4 from 50.9 in the previous month, suggesting a possible pick up in y/y growth in December IP. On the other hand, employment index slipped for the third month in a row to 48.7 from 49, evidence that uncertainties and a slowing economy have capped job creation.     
 
It is worth noting that this month's input cost index edged up to 47.1 from 44.4 (Figure 5), supporting our view that pipeline inflationary pressures remain, given the possible rebound in international prices of some commodities. To us, this means that aggressive easing in monetary policy in the near term can be ruled out. We think the PBoC will stay "prudent", while remaining alert to "downside risks to growth". Meanwhile, RRR cuts are likely to be used to "fine-tune" system liquidity and we forecast another 50bp cut before the Chinese New Year (see China: A preemptive RRR cut and more in the pipeline, 30 November, 2011).


source: BarCap