Chinese inflation showed signs of cresting in a manufacturing survey yesterday, an early indication that the government will be able to stick to its course of gradual rather than aggressive monetary tightening.
An easing of price pressures could also cap this week's jump in the yuan to a record high against the dollar, which the central bank said had played an important role in taming inflation.
The yuan rose to a record of 6.613 against the dollar on Thursday after a senior offcial from the central bank said gradual appreciation would help to curb inflation and rebalance the economy.
HSBC's China Purchasing Mangers' index fell to a three-month-low of 54.4 in December from 55.3 in November, suggesting that the pace of business expansion in the factories was moderating but still strong.
The figure offered an early clue about the direction of overall eco-nomic growth, but all eyes now are on Chinese inflation, which is
running at its fastest in more than two years, and Beijing's policy re-
sponse to price pressures.
In that arena, the HSBC survey offered a modicum of relief.
The input cost sub-index fell to a three-month low of 72.3 from 80.8
in November, while the output cost sub-index edged down to a four-month low. But both figures were still well in expansionary territory, indicating that firms were passing higher raw material costs onto their customers rather than absorbing them and taking a hit on earnings.
"Inflation rather than growth still remains the top policy concern," said Qu Hongbin, HSBC's chief economist for China.