China's factories slowed a touch in January under the weight of monetary tightening, but input prices rose quickly, keeping the pressure on the government to tackle inflation despite easing growth.
The official purchasing managers' index fell to a five-month low of 52.9 in January, the China Federation of Logistics and Purchasing said on Tuesday, missing the median forecast of 53.5 in a Reuters poll.
But analysts cautioned against reading too much into survey results for a single month, particularly as they were likely distorted by a closure of factories and a spike in consumption late in January ahead of China's Lunar New Year.
Underlining that warning, a separate PMI sponsored by HSBC pointed in the exact opposite direction from the official version, with its headline index edging up in January while its measure of input price inflation eased a touch.
Nevertheless, taken together, the two surveys painted a picture of sticky inflation and a moderate slowdown in the world's second-largest economy after 10.3 percent growth last year.
This indicates that the economic recovery trend is not yet clear, and we may see economic growth slow down a bit, Zhang Liqun, an economist in the Development Research Center, a think-tank under the cabinet.
The input price sub-index in the official PMI rebounded to 69.3 in January from 66.7 a month earlier, though was still below a peak of 73.5 hit in November.
This is the data point that will likely be of most interest to policy makers. This provides a further reason to think that headline inflation is likely to pick up in the next few months, said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.
MORE TIGHTENING NEEDED
More rate increases and yuan appreciation were needed for the government to put a lid on inflation, Jackson said.
So far, officials have moved tentatively on rates and the currency, and instead leaned heavily on administrative measures, raising banks' reserve requirements seven times since the start of last year and capping their lending, while also cracking down on property speculation.
Consumer price inflation in China ran at an annual pace of 4.6 percent in December, slowing slightly from November's 28-month high of 5.1 percent.
Many economists believe inflation is set to accelerate again in January due to a spike in food demand and broader consumption ahead of the Chinese Lunar New Year, which begins this week.
This will only reinforce the overriding theme of policy tightening to contain inflationary pressures, said Charlie Lay, economist at Forecast PTE in Singapore.
The inflationary pressures measured in the PMIs may actually have been an under-statement. The surveys of China-based businesses were conducted before the final days of January, when global oil prices surged because of the unrest in Egypt.
Nevertheless, the PMIs, designed to provide an early indication of conditions for Chinese manufacturing firms, also signaled a sustained period of industrial expansion.
It was the 23rd straight month that the official PMI has stood above the threshold of 50 that demarcates expansion from contraction. And the HSBC index nudged up to 54.5 from 54.4 in December, well above the long-run series average of 52.3.
(Additional reporting by Kevin Yao; Writing by Simon Rabinovitch; Editing by Ken Wills)