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By V. Phani Kumar, MarketWatch

 

Reuters

TCL Multimedia employees work on a production line in Huizhou, China.

HONG KONG (MarketWatch) — China’s twin measure of manufacturing activity unexpectedly strengthened in October, according to data released Monday, raising expectations that more interest-rate hikes could be on the cards due to rising input prices.

The purchasing managers’ index for October rose to 54.7 from 53.8 in the preceding month, according to data from the China Federation of Logistics and Purchasing. Economists had forecast the index to fall to 52.9, according to separate surveys by Reuters and Dow Jones Newswires.

The October data marked the 20th straight month in which the PMI data came in above 50, according to the state-run Xinhua news service. A reading above 50 shows an expansion in manufacturing, while one below 50 represents contraction.

A separate, private sector gauge of manufacturing PMI by HSBC also showed an increase in the measure to 54.8 in October from 52.9 in September.

The increases represented “one of the largest month-on-month rises in the PMI since the start of the series in April 2004,” said HSBC.

“Another upbeat reading for the HSBC China Manufacturing PMI suggests the strong growth momentum in domestic demand to warrant around 9% [gross domestic product] growth in [the fourth quarter], despite the still-soft increase in new exports orders,” said Hongbin Qu, chief economist for China at HSBC.

“The jump in output prices reflects higher input costs amidst strong demand, which also heralds a higher CPI likely to reach its cyclical peak in October,” Qu said.

Kevin Lai, China economist at Daiwa Securities, agreed that the data reflected strong domestic demand, with export orders weaker than expected, even as Christmas approached.

Chinese exports usually see an increase in the months immediately before Christmas, as local exporters step up production to meet overseas demand.

“In the last three months, the import price index has gained close to 20 [percentage] points. Inflation is coming back, and it’s coming even bigger than in the last round,” said Lai.

Lai said he expected three more rounds of interest-rate increases by the People’s Bank of China between now and the first half of 2011, with one rate increase before the end of this year, followed by two more in the ensuing six months. China increased interest rates in a surprise move last month.

“I think [inflation will] remain on the upside for the next six months at least,” said Lai