The country this week released figures showing that the price of raw materials and goods leaving its factories rose 6.8 percent year-over-year in April, its fastest growth rate in more than three years.
For most of 2020, China’s producer price index was in negative territory as Covid-19 suppressed demand. The recent and sudden increase was partly due to the comparison with a year earlier and, with consumer price increases still below 1 percent, the overall picture for inflation has remained mixed.
But the data was nonetheless a sign of pockets of price hikes emerging across China’s rapid recovery, where higher headline inflation is expected this year. It also reflected a global rally in commodity prices that was supported by voracious demand from China, as well as hopes that other major economies will rebound as well.
“A combination of China and external factors has led to this surge in PPI,” said Robin Xing, chief China economist at Morgan Stanley. “It’s like a perfect storm.”
China’s PPI index is made up of the prices of production products, such as cabinets or washing machines, that factories sell to stores before they are sold to consumers.
It also includes the prices of raw materials and commodities, such as coal, when sold by mining companies to companies that use them to make goods.
It was the latter that was at the origin of the recent surge in Chinese producer prices. Global commodity prices, which collapsed last year at the start of the pandemic, have since rebounded. Iron ore hit its highest level on record this week, while oil prices recovered sharply from a year ago.
Xing estimated that 70 percent of the April PPI increase was attributable to commodities. This rally was also linked to the recovery in China, which was supported by strong industrial growth and a construction boom that led to record steel production last year.
As such, the data reflected both the pace of the recovery in China and a global commodities rally it helped fuel and now goes beyond.
For policymakers, a crucial question is whether the rise in producer prices will affect consumer prices. China’s consumer price index was just 0.9% in April – its highest level in seven months, but far from a level that would engender immediate fears of broader inflation in China .
While economists expect China’s CPI inflation to rise this year, they have suggested that any reaction from the People’s Bank of China to this week’s data is unlikely. The share of the producer price index that represents the prices at which firms buy consumer goods, as opposed to raw materials, has increased only 0.3 percent year over year.
HSBC analysts said the transmission from the PPI to the CPI would be “limited”, allowing policymakers to remain “dovish.”
Ting Lu, chief China economist at Nomura, predicts that CPI inflation will reach 2.8% by the end of the year, with PPI “pass-through” effects. But he suggested that the PBoC was unlikely to tighten in response to the IPP and that the rise in commodity prices instead posed a risk to Chinese demand and the broader recovery given controls on availability. credit.
“For a typical borrower, $ 1 billion six months ago might be enough to buy steel and cement to complete a project, but today is [maybe] no, ”he said.
While the PBoC has not raised official rates since lowering them last year, the Chinese government has nonetheless tightened credit conditions in recent months.
It has also taken steps to contain both its real estate sector, fearing that the easier money will encourage asset bubbles, and its steel sector, which has produced the metal at a rate that threatens the environmental commitments of Beijing.
China’s gradual decarbonization ambitions – and all the production cuts they entail in the country – are seen as supply constraints, pushing commodity prices even higher.
Beyond commodities, economists are watching closely for other shortages. Iris Pang, chief economist for greater China at ING, said producer price inflation would be followed by chip inflation. A semiconductor shortage, she said, was already starting to drive price increases for consumer products like washing machines and laptops.
While the PPI index showed a much smaller increase in consumer goods than in commodities, on a monthly basis there were notable increases. Durable consumer goods rose 0.4% per month in April, the fastest pace of growth since at least 2011, according to CEIC, a data company.
Besides domestic construction, part of the demand for raw materials has been to stimulate the production of goods for export to Western countries.
Data on Friday showed Chinese exports jumped 32.3% year-on-year in April. But even compared to April 2019, before the pandemic, the increase was around 16% on an annualized basis, Morgan Stanley estimated.
Competition among producers in China meant that this did not necessarily imply inflation for consumers abroad. Instead, the recent PPI surge in China hinted at only one of the global effects of Western responses to the pandemic.
“If you’re trying to figure out what the final demand is here for this PPI pickup, it’s a global stimulus,” Xing said. “External demand has led to the resumption of Chinese exports, [and] now it is well beyond its potential growth ”.