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Good news has officially become bad news as the Chinese market exits the “sweet spot” and enters the “tightening phase” of the bear market (see here for Draaisma’s explanation).   The latest PMI report from HSBC reports on the rapid pace of expansion and jump in inflation:

At 57.4, up from 56.1 in the previous month, the headline HSBC China Manufacturing PMI rose to a record high at the start of 2010, signalling a marked improvement of operating conditions in the Chinese manufacturing sector. The index has now risen more than sixteen points since posting a record low in November 2008.

Prices charged by Chinese manufacturers rose again in January, extending the current period of inflation to seven months. The rate at which firms raised their charges was the most marked since July 2008, mainly reflecting rising input prices. Higher client demand also allowed manufacturers to raise their factory gate prices on the month.

Hongbin Qu, Chief Economist China at HSBC said the acceleration is likely to increase tightening fears in the months ahead:

“Industrial activity continues to accelerate, implying stronger GDP growth in 1Q. But rising input and output prices also point to greater inflationary pressure, which will likely prompt more tightening measures in the coming months.”

As of 1AM EST Shanghai stocks were down 1.8% as good news has officially become bad news.

Source: HSBC