Manufacturing Activity Expands in Asia

Asia looks set to continue its strong economic recovery into the new year, new data showed Monday, adding to the perception that authorities could soon look for a chance to tighten their fiscal and monetary policies.

Manufacturing indices in China, South Korea, Taiwan and India showed continuing expansion in December. The findings were particularly strong in China, where a number of other measures indicate the economy — a key regional catalyst — likely grew at its fastest pace in the final quarter of 2009 since the global economic crisis began.

The data come as Asian countries consider pulling back on easy-monetary policies and fiscal stimulus efforts adopted during the global financial crisis. Australia’s central bank was one of the world’s first to raise its key policy rate, and markets watchers are waiting to see if and when recovering nations such as India and South Korea follow suit.

“The data are coming at a time when Asia has ultra-low interest rates, strong growth and very accommodating monetary policy,” said Sean Darby, a strategist at Nomura International in Hong Kong. “The better growth rates are, the greater the likelihood that inflation will be greater than the market is estimating.”

Underscoring the uncertainty, other data Monday highlighted how dependent Asian economies remain on U.S. and Europe, which are not as far along the recovery path.

Singapore’s gross domestic product contracted more sharply than expected in the fourth quarter, falling 6.8% quarter-to-quarter in seasonally adjusted, annualized terms, and contracting 2.1% for the entire year.

“The Asian recovery [and by the same token the regional outlook for 2010] remains vulnerable, particularly for those countries that can not rely too much on domestic demand,” Calyon analyst Sebastien Barbe said.

Still, Monday’s data were greeted mostly positively by investors, sending shares modestly higher in Japan, South Korea, India and Taiwan, though shares also fell in China and Hong Kong.

In China, the HSBC PMI rose to 56.1 in December — its highest level in 20 months — from 55.7 in November. It was the ninth straight month that the index was above 50.0, a level that indicates growth.

That confirmed the findings of a similar index last Friday from the National Bureau of Statistics and the China Federation of Logistics and Purchasing. That index showed manufacturing activity expanding for the tenth straight month, to 56.6 in December from 55.2 in November.

Together they indicate that China’s economy has resumed its previously fast growth rates amid considerable government-led stimulus programs.

Across the straits, the HSBC PMI for Taiwan rose to 58.7 in December from 58.4 a month earlier, its 10th straight month of increase.

“Perhaps the most encouraging news,” in HSBC’s view, was the sharp rise in a subcomponent of the Taiwan index that measures new export orders.

“Like elsewhere in Asia, most notably in Korea, strong demand from emerging Asian countries continues to fuel the island’s exports recovery,” HSBC wrote in a research note.

Data released on New Year’s Day showed South Korean exports — considered a key gauge of global demand — rose 33.7% year-to-year in December. On Monday, HSBC’s PMI for Korea edged up to a seasonally adjusted 52.8 in December, from 52.6 in November.

HSBC said Monday’s PMI data doesn’t support the case for a rate hike this month, noting that “pricing power for Korean firms hasn’t returned yet and that worries over inflationary pressures are overdone.”

In India, HSBC data showed that manufacturing activity rose to 55.6 in December from 53.0 in November, its fastest growth since May. Output, new business and employment — the three largest components of the Indian index — all grew in December.

Not all of Monday’s data were rosy: HSBC’s PMI for Australia showed that manufacturing activity fell slightly in December as production, new orders and input deliveries all dropped. The Australian PMI was down 2.7 points to 48.5, falling below the 50-point line that separates expansion from contraction.

The Reserve Bank of Australia was one of the first central banks to rein in its easy monetary policy as its economy recovered, raising interest rates three times in recent months by a total of 0.75 percentage points.

Several other countries are beginning to feel significant price pressures as their economies recover, though probably not enough to prompt their central banks to begin tightening monetary policy yet.

In Thailand, consumer prices rose 3.5% on-year in December, up from 1.9% in November and 0.4% in October. The rise in core CPI — which strips out energy and food costs — was less alarming, rising 0.2% from a year earlier.

The core rise was below the central bank’s target range of 0.5%-3.0%, making it likely that the Bank of Thailand will keep its policy rate on hold at 1.25% at its Jan. 13 meeting.

Bank Indonesia also is considered unlikely to raise rates when it meets Wednesday, especially after CPI came in below forecast Monday, rising 0.33% month-to-month in December and 2.78% year-to-year.