By Bloomberg News Jan. 4 (Bloomberg) -- Chinese manufacturing expanded by the most in five years in December, supporting estimates that growth has accelerated to more than 10 percent in the world’s third- biggest economy. A purchasing managers’ index rose to a seasonally adjusted 56.1, HSBC Holdings Plc and Markit Economics said today in an e- mailed statement. The measure is based on a survey of more than 400 manufacturing companies. Today’s release may deepen concern that inflation pressures are building and parts of the Chinese economy could overheat this year. Liu Mingkang, China’s top banking regulator, said today that while asset bubbles are a threat, banks have “more than” enough capital and should extend loans to consumers and smaller businesses to sustain growth. “China’s economy is continuing a V-shaped recovery and economic growth may have quickened to 11 percent in the fourth quarter,” said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. “There are early signs that the economy may be entering an overheating stage,” he added, citing rising raw-material costs and company inventories at high levels. The Shanghai Composite Index fell 0.4% as of 11:30 a.m. local time. Inflation Focus China’s economy may have expanded 10.4 percent in the fourth quarter of 2009, according to the median estimate of economists, and Sun forecasts 10.5 percent growth this year. Central bank adviser Fan Gang cautioned Nov. 18 that a “double- digit” gain wouldn’t be good in 2010 amid the rising risk of bubbles in stock, real estate and commodity prices. Inflation may become “an increasing focus” for China’s officials and “the case for tighter policy, including a stronger currency, is likely to build in coming months,” said Brian Jackson, a Hong Kong-based strategist on emerging markets at Royal Bank of Canada. Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of deflation. Premier Wen Jiabao said Dec. 27 that China will “absolutely not yield” to pressure from foreign countries for currency gains as the nation holds the yuan at about 6.83 per dollar. Today’s PMI number was the highest since April 2004, the first month of the HSBC survey. The official PMI, which was released Jan. 1 and has a different methodology, showed the biggest expansion in 20 months. In the studies, a number above 50 indicates an expansion. Steel, Aluminum Output prices rose at the fastest pace since July 2008 as companies reported rising costs for raw materials including steel, aluminum, coal and petroleum, HSBC said. A $586 billion stimulus package, subsidies for consumer purchases and record new loans have driven the nation’s recovery from the slowest growth in almost a decade. Liu wrote in an opinion piece in Bloomberg News today that banks should lend to “boost consumer spending, support rural development and qualified small and medium-sized enterprises, improve health care and the social-security system, and facilitate pollution reduction and energy saving.” He cautioned that the economy faces challenges including weak export demand and the threat of “structural bubbles.” China’s leaders pledged last month to maintain stimulus and keep a “moderate loose” monetary policy to cement a recovery, after the economy grew at the fastest pace in a year in the third quarter, expanding 8.9 percent. Industrial companies’ profits rose 7.8 percent in the first 11 months of last year to a record 2.59 trillion yuan ($379 billion), the statistics bureau said last month. Wuhan Iron & Steel Group, China’s third-biggest steelmaker, plans to boost production by 24 percent this year to meet rising demand from automakers, home-appliance manufacturers and builders. Skyworth Digital Holdings Ltd., a Hong Kong-listed television maker, said Dec. 2 that profit jumped 530 percent in the six months ended Sept. 30 as Chinese government subsidies spurred appliance sales. --Li Yanping. Editors: Paul Panckhurst, Russell Ward. To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

Source