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For investors and governments looking to spot any signs of inflation as the global economy recovers from the coronavirus pandemic, Chinese factories are a good place to look.
The country has released figures this week showing that the price of raw materials and goods leaving its factories rose by 6.8% year-on-year. faster growth rate in more than three years.
For most of 2020, China’s output price index was in negative territory as Covid suppressed demand. The recent and sudden rise is due in part to the comparison with a year earlier and, with consumer price rises still below 1%, the overall picture of inflation is mixed.
But the data is nonetheless a sign of rising price spikes in China’s rapid recovery, where higher global inflation is expected this year. It reflects a global rise in commodity prices that has been supported by China’s voracious demand, as well as the hope that other major economies will also recover.
“A combination of China and external factors led to this rise in the PPI,” said Robin Xing, chief economist at China’s Morgan Stanley. “It’s like a perfect storm.”
China’s PPI index is made up of prices of production goods, such as cabinets or washing machines, that factories sell in stores before selling them to consumers.
It also includes the prices of raw materials and commodities, such as coal, when they are sold from companies that extract them to companies that use them to make goods.
It is the latter that has driven the recent rise in prices in Chinese production. World commodity prices plummeted last year in the early stages of the pandemic and have since risen. This week, iron ore reached its highest level on record, while oil prices have recovered sharply from last year.
Xing estimates that 70 percent of the April PPI increase is based on commodities. This rally is linked to the recovery of China, which has been driven by strong industrial growth and a construction boom that led to steel production record last year.
As such, the data reflects both China’s pace of recovery and a global commodity concentration that helped feed and now extends further.
For policymakers, a crucial question is whether higher producer prices will reach consumer prices. China’s consumer price index was 0.9% in April, its highest level in seven months, but far from a level that would generate immediate fears of broader inflation in China. .
While economists expect a rise in CPI inflation in China this year, they suggest it is unlikely to react to this week’s data from the People’s Bank of China. The share of the production price index that represents the prices at which firms buy consumer goods, compared to raw materials, increases by only 0.3% year-on-year.
HSBC analysts noted that the transmission of the PPI to the CPI would be “limited”, which would allow policymakers to remain “accommodated”.
Ting Lu, China’s chief economist in Nomura, expects CPI inflation to rise to 2.8 percent by the end of the year, with “pass-through” effects on the PPI. But he suggested that the PBoC was unlikely to narrow in response to the PPI and that higher commodity prices posed a risk to Chinese demand and a wider recovery, given the control over the availability of credit.
“For a typical borrower, six months ago with $ 1 billion may be enough to buy steel and cement to finish a project, but today it’s [maybe] no, ”he said.
Although the PBoC has not raised official rates since lowering them last year, the Chinese government has, however, tightened credit conditions in recent months.
It has also taken steps to curb both its real estate sector, in the face of concerns that easier money would encourage asset bubbles, and its steel sector, which has produced the metal at a rate that threatens new environmental commitments.
China’s gradual decarbonisation ambitions and resulting production cuts in the country are seen as supply constraints, which further increase commodity prices.
Beyond raw materials, economists are closely watching other shortages. Iris Pang, chief economist of Greater China at ING, said producer price inflation would be followed by chip inflation. The lack of semiconductor chips, he said, was already beginning to drive rising consumer product prices such as washing machines and laptops.
Although the PPI index shows a much weaker increase in consumer goods than in raw materials, there are notable increases between months. Durable consumer goods rose 0.4% year-on-year in April, the fastest growth rate since at least 2011, according to CEIC, a data company.
Apart from domestic construction in China, part of the demand for raw materials has been to boost the production of goods that are exported to Western countries.
Data from Friday showed that Chinese exports jumped 32.3% year-on-year in April. But even when compared to April 2019, before the pandemic, the increase was 16% annually, according to Morgan Stanley.
Competition between producers in China means that this does not necessarily imply inflation for overseas consumers. In contrast, China’s recent PPI jump hints at just one of the global effects of Western responses to the pandemic.
“If you try to figure out what the final demand is here for this PPI recovery, it’s a global stimulus,” Xing said. “External demand led to the recovery of China’s exports, [and] it is now far beyond its growth potential ”.
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