Private sector business expansion in the city showed moderate improvement in March, after hitting a three-month low in February. The HSBC Hong Kong Purchasing Managers Index (PMI) rose to 54.9 in March, up from 53.7 during the previous month.

However, input costs recorded their second-fastest increase ever and inflation accelerated to a 33-month high for the month, suggesting that a proportion of input costs had been passed on to customers.

A reading above 50 on the PMI indicates that the economy is expanding, while a reading below 50 shows that it is contracting. March represented the 21st consecutive monthly increase of business expansion in the city's private sector.

The HSBC Hong Kong PMI report is based on the data complied from monthly answers based on questionnaires sent to purchasing executives from more than 300 companies. The questionnaires cover sub-indices including output production, new business order intake, employment, output price, input cost and others.

Thanks to an uptake of local and mainland business orders, both the output index and the new orders index were raised to 56.4 and 56 in March respectively compared with the previous figure of 54.9 and 54.1 in February.

The employment index retreated modestly to 52.2 in March compared with the figure of 52.6 in February.

However, Hong Kong companies' input costs in March grew at the second-fastest rate since the HSBC compiled the PMI, mainly fueled by rising raw materials prices and higher wages. The overall input prices index has jumped sharply to 71 in March compared to 66.6 in February.

Because of the soaring input costs, the output price index also accelerated to 59.4 in March versus 57.2 in February - a 33-month high.

"Robust external and internal demand has ensured ongoing strength for the local economy in the first quarter. Where we see some cause for concern is the combination of strong trade momentum mixed with increasing inflationary pressures, which may lead to overheating in the broader economy," HSBC Hong Kong Chief Executive Mark McCombe said in the Wednesday press statement.

Against a backdrop of a sustained global economic recovery, a weak US dollar unleashed by the US's second round of quantitative easing measures to the tune of $600 billion and soaring global and commodity prices, inflation has been on the rise. In the financial budget announced in late February, the government forecast that the local inflation rate will hover around 4.5 percent in 2011.

The PMI result also demonstrated that the local economy is poised to register solid economic growth in the first quarter of 2011, according to HSBC. The government still has not announced economic growth figures for the last quarter of 2010 despite making the prediction in February that the annual economic growth will be 4 percent in real terms for the period of 2012 to 2015.

Looking ahead, HSBC believes that macroeconomic tightening policies on the mainland may help in combating some portion of the cost inflationary pressures in the local economy.

"Although weaknesses in the US economy could potentially fuel cost pressures further, we believe policy measures being taken by the mainland authorities will help alleviate the impacts of these risks to an extent," McCombe added.

China Daily

(HK Edition 04/07/2011 page2)