China inflation: rising factory-gate prices show ‘market’s concerns about outlook have emerged’

Orange Wang
·5-min read

A stronger-than-expected rise in China’s factory-gate prices last month has stoked concerns among Chinese analysts and market participants about a rise in inflation in China in the period ahead.

Chinese government officials and analysts were already on edge about the possibility that US President Joe Biden’s US$1.9 trillion coronavirus relief package would cause the global economy to overheat and asset bubbles to develop in financial markets. The US Congress was expected to give final approval to that package later on Wednesday, which would allow Biden to sign it into law later this week.

Chinese analysts said on Wednesday that a rise in the producer price index was yet one more reason to expect Beijing to tighten its economic support policies in the near future, even though officials conceded this week that the nation’s domestic economic recovery was not yet on solid ground.

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China’s producer price index (PPI), which reflects the prices that factories charge wholesalers for their products, rose to 1.7 per cent in February from a year earlier, a sharp increase from the gain of 0.3 per cent in January, according to the National Bureau Statistics (NBS) on Wednesday.

The 1.7 per cent increase was stronger than economists’ forecasts of 1.5 per cent in a Bloomberg survey.

Producer prices rose 0.8 per cent on the month in February after a monthly gain of 1.0 per cent in January, underscoring an increase in price pressures at the factory level.

Dong Lijuan, a senior statistician at the NBS, said that the continued upward trend of international crude oil prices and metal commodity prices, along with an increase in domestic demand for industrial raw materials, were the main reasons behind the sharp rise in PPI last month.

Prices for commodities such as crude oil and copper rose sharply in recent months on expectations of a strong global economic rebound, buoyed by the Biden administration’s coronavirus rescue plan and the widespread roll-out of coronavirus vaccines.

The price of Brent crude oil, the international benchmark, rose 18 per cent in February, while the price of copper rose more than 6 per cent during the month after gains of 2.6 per cent in January and 9.9 per cent in December.

Broader price pressures continued to pick up, and we think underlying inflation is likely to rise further in the coming months

Julian Evans-Pritchard

Lu Ting, chief economist at Nomura, said that the latest PPI figures showed that inflation in China has begun to rise more than previously expected, boosted by the recent steep increase in commodity prices and the low, virus-depressed comparison base from a year ago.

“With the fast roll-out of vaccinations across the world, massive fiscal stimulus in major developed market economies, ongoing [central bank] quantitative easing and extremely low interest rates, commodity prices and inflation expectations could rise further in the coming months,” Lu wrote in a note on Wednesday.

He expected that PPI will rise further to 3.0 per cent in March, and he did not expect it to moderate until reaching a peak of 5.8 per cent mid-year. He boosted his forecast for PPI in 2021 to 4.2 per cent from 2.7 per cent prior to Wednesday’s data.

“Broader price pressures continued to pick up, and we think underlying inflation is likely to rise further in the coming months,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note on Wednesday.

China’s monetary tightening seen as a ‘warning to public’ to cool market expectations

He expected that the Chinese central bank was likely to tighten monetary policy this year after officials signalled a hawkish tilt in recent weeks.

The median forecast among analysts for PPI in March has risen to 2.3 per cent, with the highest prediction at 3.5 per cent, according to a survey by Capital Weekly, a Chinese financial magazine.

“This shows that the market’s concerns about the inflation outlook have emerged,” Hu Yuexiao, an analyst at Shanghai Securities, wrote in a note on Tuesday. “The previous market view of subdued prices has already changed.”

The Chinese PPI data plays into existing financial market concerns surrounding a stronger-than-expected global economic rebound and a spike in inflation in the period ahead, fuelled by continued US fiscal and monetary stimulus. Those fears have caused the yield on US Treasury 10-year notes to rise to their highest level in more than a year.

On Monday, US Treasury Secretary Janet Yellen dismissed concerns about a sharp rise in price pressures, noting that the US inflation rate before the pandemic “was too low rather than too high”.

“If it turns out to be inflationary, there are tools to deal with that,” said Yellen, the former chair of the Federal Reserve, the US central bank.

Even before Wednesday’s PPI data, Beijing policy advisers had expressed increasing concerns that the aggressive expansion of US economic stimulus would hurt other countries, including China.

Ren Zeping, chief economist at the Evergrande Research Institute, said that the sharp increase in market liquidity resulting from US economic stimulus had led to soaring international prices for commodities such as crude oil, copper and iron ore, pushing up inflation expectations in China and creating the risk of financial and property asset bubbles.

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China’s purchasing managers’ indexes showed that activity in both manufacturing and services sectors slowed in February, due in part to the higher costs of raw materials.

“Stagflation is coming,” Ren warned in a note on Tuesday, referring to a possible period of high inflation and low growth.

But Chen Xing, chief macro analyst with the research institute of Zhongtai Securities, downplayed the prospect of a sharp rise in inflation in China, given that domestic consumer demand remained weak and because government restrictions on the domestic real estate market were likely to hold down industrial product prices.

“The overseas economic recovery has accelerated significantly since the beginning of this year, but as far as China is concerned, the peak of this round of economic growth momentum may have passed,” he wrote in a note on Monday.

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