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China’s manufacturing expands at fastest pace in five month, inflation pressures builds – private survey

China’s factory activity expanded at the fastest pace this year in May as domestic and export demand picked up, though sharp rises in raw material prices and strains in supply chains crimped some companies’ production, a business survey showed on Tuesday.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives an independent snapshot of the country’s manufacturing sector, rose slightly to 52 in May from 51.9 the previous month, according to a report released Tuesday. A number above 50 signals an expansion in activity, while a reading below that indicates a contraction.

Analysts polled by Reuters had expected the index to remain at 51.9. The 50-mark separates growth from contraction on a monthly basis.

The sub-index for new orders rose at the strongest pace so far this year and a gauge for export orders was the highest since November, but the output reading, while still solid, was slightly lower than the previous month.

“Manufacturers stayed confident about the business outlook as the gauge for future output expectations was higher than the long-term average,” said Wang Zhe, senior economist at Caixin Insight Group.

“Rapidly rising commodity prices began to disrupt the economy as some enterprises began to hoard goods, while some others suffered raw material shortages. Supply chains were also significantly affected,” said Wang. “Inflation was still a crucial concern as prices continued rising,” Zhe said.

A subindex for input costs expanded at the fastest pace since 2016.

Manufacturers passed on some of the pressure to their customers, with a gauge for output prices rising at the quickest pace in a decade. Charges for exported goods rose at the fastest rate in three years.

Prices for commodities such as coal, steel, iron ore and copper have surged this year, fuelled by the lifting of pandemic lockdowns in many countries and ample global liquidity.

China’s policymakers have repeatedly expressed concern about rising commodity prices in recent weeks and called for stricter management of supply and demand and to crack down on “malicious speculation.”

The warnings have prompted some pullback in metals prices but analysts are unsure how long such a correction may last given improving global demand.

Firms continued to hire but at a slower pace, with some enterprises saying they were trying to reduce costs.

Earnings at China’s industrial firms grew at a slower pace in April, with high commodity prices and weaker performance in the consumer goods sector limiting overall profitability from manufacturing.

China’s economy posted record growth in the first quarter as it recovered quickly from the pandemic although analysts expect the brisk expansion to moderate later this year.

Officials warn the foundations for economic recovery are not yet secure amid problems like higher raw material costs.

On Monday, China’s official manufacturing PMI fell slightly to 51.0 in May from 51.1 in April.