As previously expected, March's official Purchasing Managers Index (PMI) indicator showed a fairly strong recovery at 53.4, up 1.2 percent from last month. Prior to this month's rise, the PMI had fallen for three consecutive months.

HSBC reported a March PMI indicator of 51.8, almost the same as last month's number, 51.7.

The PMI is an indicator of economic activity that roughly reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

Industry indicators also showed strong recovery in manufacturing. Output and employment indicators increased 1.9 and 2.9 percentage month-on-month, respectively. These indicators had also fallen over the last few months. Purchasing order indicators also began to recover. New order and new export order indicators rose 0.9 and 1.6 percent, respectively.

Notably, all types of inventory indices saw large upticks. Backlog order, finished goods inventory and raw materials inventory indices showed strong growth of 4.8, 4.9 and 2.1 percent, respectively, indicating backlogged orders from the Spring Festival holiday season still need to be processed. The increases also suggest manufacturers are optimistic about future production. However, firms remain concerned about rising raw material costs, leading them to stock up on key materials in advance of expected cost hikes.

Purchasing prices slipped slightly but remained relatively high. The purchasing price index for power has increased for the past seven consecutive months, remaining above 65. This relatively high price level indicates upwards cost pressures on producers remain substantial.

Based on the new PMI figures, the recovery basically meets prior expectations and keeps with China's seasonal production cycle. We expect the PMI to continue to climb in coming months, though it is quite possible it will peak in April.

After falling for the last two months, the PMI's March rebound indicates the Chinese economy is on an upswing, but the strength of its rise has weakened. We predict China's first quarter GDP will grow 9.3 percent year-on-year. Although this increase is somewhat smaller than the 9.8 percent jump in Q4 last year, the drop is primarily due to a higher baseline and the consciously contractionary monetary policy that the Chinese central bank has adopted. Overall, the Chinese economy remains on an upward trend.

Purchasing prices have continued their rise, meaning China still faces pressure from imported inflation. Over the mid to long run, bulk commodity prices will continue to see considerable upward pressure from instability in the Arab world and reconstruction after the Japanese earthquake. We believe the yuan's appreciation will alleviate the threat posed by imported inflation. The spot exchange rate of the RMB against the dollar fell below 6.55 yesterday, breaking an important psychological barrier. This development shows the Chinese monetary authority has begun using a series of policy tools to fight the inflationary risks faced by the macroeconomy. We still expect the RMB to appreciate 5-6 percent against the dollar by the end of the year.

Besides foreign exchange policy, we believe the Chinese monetary authority needs to gradually tighten interest rate policy. Before the April 15 release of CPI data, we think the Chinese central bank will likely raise interest rates in a gradual effort to eliminate negative real interest rates.

The author is head of China Economic Research at ANZ.

(This article was written in Chinese and translated by Matt Velker.)

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