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For investors and governments eager to detect signs of inflation, as the global economy recovers from the coronavirus pandemic, China’s factories are a good place.
This week the figure shows that the price of raw materials and goods coming out of its factories has risen by 6.8 per cent, the fastest growth in more than three years.
In almost all of 2020, the Chinese producer price index was in negative territory as Covid removed demand. The recent and sudden rise is partly driven by comparisons made a year earlier, and when consumer prices rise by less than 1 per cent, the overall picture of inflation is mixed.
But the data, however, is a sign of rising stock prices in China’s rapid recovery, as higher overall inflation is expected this year. It reflects the global rise in commodity prices, which supports China’s embarrassing demand and the hope that other major economies will also back down.
“The combination of China and foreign factors led to the rise in the PPI,” said Robin Xing Morgan Stanley, China’s chief economist. “It’s like the perfect storm.”
China’s PPI index is made up of factory commodity prices, such as cabinets or washing machines, which factories sell to outlets before they are sold to consumers.
It also includes the prices of raw materials and raw materials, such as coal, from the companies that extract them to the businesses that use them to make goods.
The latter is what has driven the recent rise in Chinese producer prices. Global commodity prices fell in the early stages of the pandemic last year, and have fallen again since then. This week, iron it reached its highest record level, while oil prices recovered significantly compared to last year.
Xing estimates that 70% of the April PPI rise is caused by goods. This rally is linked to the resurgence of China, which has led to strong industrial growth and rising construction steel production record last year.
Thus, the data reflect the pace of China’s recovery, as well as the global rally of commodities, which helped feed and now extends beyond that.
For politicians, the crucial question is whether higher producer prices will reach consumer prices. China’s consumer price index was just 0.9 percent in April – the highest level in seven months, but far from the level that would create immediate fears of broader inflation in China.
While economists expect CPI inflation to rise in China this year, they suggest they have no reaction to data from the People’s Bank of China this week. The share of the producer price index, which represents the prices at which companies buy consumer goods, rose by only 0.3 per cent year-on-year in relation to raw materials.
HSBC analysts said the transmission from PPI to KPI would be “limited” so that policy makers can continue to be “appropriate”.
China’s chief economist Ting Lu Nomura expects CPI inflation to rise to 2.8% by the end of the year, with PPI “passage” effects. But he suggested that it would be difficult to tighten PBoC to respond to the PPI, and that higher commodity prices posed a risk to Chinese demand and that broader recovery provided controls on credit availability.
“For an ordinary borrower, $ 1 billion six months ago might be enough to complete a project to buy steel and cement, but now [maybe] no, ”he said.
Although the PBoC has not had official rates since they fell last year, the Chinese government has nevertheless tightened credit conditions in recent months.
It has also taken steps to control both its property sector, out of concerns that money would make it easier to push asset bubbles, and the steel sector, which has transformed the metal at a pace that threatens new environmental commitments.
China’s gradual decarbonisation intentions and the resulting production cuts in the country are seen as a limit to supply, further boosting the price of raw materials.
Beyond raw materials, economists are observing other shortcomings. Iris Pang, China’s top Chinese economist, said producer price inflation will be chip inflation. The shortage of semiconductor chips, he said, had already begun to raise prices for consumer products, such as washing machines and laptops.
Although the PPI index shows much lower growth in consumer goods than raw materials, there are significant month-on-month increases. Durable consumer goods rose by 0.4% per month in April, at least the fastest pace of growth since 2011, according to the CEIC data company.
In addition to China’s domestic construction, part of the demand for raw materials has been to boost the production of goods exported to western countries.
Friday’s data showed that Chinese exports fell 32.3 percent in April year-on-year. Morgan Stanley estimates that even compared to April 2019, before the pandemic, the increase was about 16% per year.
Competition between Chinese producers means that this does not necessarily mean inflation for foreign consumers. Instead, China’s latest PPI jumps provide just one of them the global impact of Western responses to the pandemic.
“If you’re trying to guess what the latest demand for PPI recovery is here, it’s a global stimulus,” Xing said. “Foreign demand led to a recovery in Chinese exports, [and] now it is much more than its growth potential ”.
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