International | Jun 01 2006
By Rudi Filapek-Vandyck
It is not exactly news the global investment community is craving for at the moment, but new economic data as amalgamated by CLSA (a leading provider of brokerage and investment banking services in the Asia-Pacific Market) will boost current fears that global inflation will inch up further, soon.
CLSA’s latest survey data for the month of May highlighted a further improvement in Chinese manufacturing business conditions with the CLSA China Purchasing Managers’ Index rising to 52.8, its highest level for a year, versus April’s 52.7.
While this in itself could be interpreted as good news for economic prospects inside and outside China, CLSA points out it is not.
"While the marginal improvement in overall activity in May is to be welcomed all eyes really have to be focused on the price indices", CLSA comments, adding the jump in May input prices to 70.7 from 58.7 came before the 9% rise in global oil prices. It comments this "should send shudders down the backs of all investors".
Output prices jumped to a reading of 55.9 from April’s 52.5, but CLSA notes they are clearly lagging the increase in costs for Chinese manufacturers. This leads CLSA to the conclusion that Chinese manufacturing profits were "in a vice-like squeeze" before the latest release and they are now "facing extreme challenges".
It is only a question of time before these price increases are passed through by Chinese manufacturers into global inflation, CLSA believes. This leads to the conclusion the global era of cheap goods coming from China is over.
As long as activity remains at inflated levels, and signals from around the world show no signs of softening growth, CLSA believes commodity prices will remain firm and Chinese exporters will remain under pressure to raise final goods prices. It adds, anecdotally, this is happening already".
Jim Walker, Chief Economist at CLSA, says there can be only one conclusion and that is global interest rates will be moving higher still.
CLSA also reports the rate of input price inflation in the Chinese manufacturing economy rose from April’s already strong pace to a fourteen-month high in May, with 44% of panelists signaling a rise in their average purchase costs since the previous month.
In order to offset rapidly rising input costs, Chinese manufacturers raised their charges again in May. According to CLSA, the rate of output price inflation was the sharpest since March 2005, although still well below that of input prices, reflecting intense competition in a number of markets.
CLSA believes this suggests a further squeeze of profit margins among Chinese manufacturers.
