As Chinese producer prices soar, there are signs of inflation

The Chinese factory is a good place for investors and governments eager to find that inflation is desperately needed as the global economy recovers from the coronavirus pandemic.

The country’s data released this week showed that the prices of raw materials and commodities leaving the factory rose by 6.8% year-on-year. Fastest growth rate In more than three years.

For almost the entire 2020, China’s producer price index is in a negative area due to Covid’s suppression of demand. The recent and sudden increase is partly driven by a year-on-year drive, and since consumer price increases are still below 1%, overall inflation is mixed.

However, the data still shows that in the process of China’s rapid recovery, there have been some signs of price increases, and it is expected that China’s overall inflation rate will be higher this year. It reflects the rise in global commodity prices, which has been supported by strong demand in China, and it is hoped that other large economies will also rebound.

Robin Xing, chief China economist at Morgan Stanley, said: “China and external factors have caused the PPI to soar.” “It’s like a perfect storm.”

China’s producer price index consists of the prices of producer products such as wardrobes 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) that are sold from companies that mine them to companies that use them to produce commodities.

It is the latter that has led to the recent increase in producer prices in China. At the beginning of the pandemic last year, global commodity prices plummeted, and have since rebounded. this week, iron ore Reached the highest level on record, and oil prices have risen sharply from last year.

Xing estimated that 70% of PPI growth in April was driven by commodities. This rebound is related to China’s recovery. China’s strong growth is driven by strong industrial growth and construction boom. Last year’s steel production hit a record high.

In this way, the data not only reflects the pace of China’s recovery, but also reflects the rise of global commodities promoted by China, which is now beyond this range.

For decision makers, A key question is whether higher producer prices will affect consumer prices. China’s April consumer price index was only 0.9%, the highest level in seven months, but it was far from the level that immediately caused people to worry about China’s inflation.

Although economists expect China’s CPI inflation to rise this year, they hinted that it is unlikely to make any response to the data from the People’s Bank of China this week. The part of the producer price index that represents the price at which companies buy consumer goods rather than raw materials increased by only 0.3% year-on-year.

Analysts at HSBC pointed out that the transmission from PPI to CPI is “limited”, allowing policymakers to maintain a “relaxed” attitude.

Ting Lu, Nomura’s chief China economist, predicts that due to the “pass-through” effect of the PPI, the CPI inflation rate will rise to 2.8% before the end of the year. However, he believes that the People’s Bank of China is unlikely to tighten monetary policy due to the PPI, and higher raw material prices have brought risks to China’s demand, and the recovery will be wider with the availability of credit under control.

“For a typical borrower, $1 billion six months ago may be enough to buy steel and cement to complete a project, but today, [maybe] No,” he said.

Since last year, the People’s Bank of China has not raised official interest rates, but the Chinese government has tightened credit conditions in recent months.

Fearing that easing funds would encourage asset bubbles, the steel industry has also taken measures to control the real estate industry, and the steel industry has also produced metals at a rate that inhibits new environmental commitments.

China’s gradual decarbonization ambitions and any reductions in production at home are seen as restrictions on supply, further boosting commodity prices.

In addition to raw materials, economists are also paying close attention to other shortages. Iris Pang, ING’s chief economist for Greater China, said that the rise in producer prices will be followed by chip inflation. She said the shortage of semiconductor chips has already begun to drive up the prices of consumer products such as washing machines and laptops.

The PPI index shows that the growth of consumer goods is far weaker than that of raw materials, but the month-on-month growth is significant. Data company CEIC said that durable consumer goods increased by 0.4% month-on-month in April, the fastest growth rate since 2011.

In addition to domestic construction in China, part of the demand for raw materials is also used to promote the production of goods exported to Western countries.

Data on Friday showed that China’s exports in April increased by 32.3% year-on-year. Morgan Stanley estimates that even compared to April 2019 before the pandemic, it has increased by about 16% on an annual basis.

Competition among Chinese producers means that this does not necessarily mean inflation for overseas consumers.On the contrary, China’s recent PPI jump only implies The global impact of the Western response to the pandemic.

Xing said: “If you try to figure out what the ultimate demand for this PPI recovery is, it is global stimulus.” “External demand leads to a recovery in China’s exports. [and] It is now far beyond its potential growth”.

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