The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.
The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.
The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.
While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.
“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.
“We’re going to see some reflation trends,” he added.
Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.
China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.
An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher.
Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.
Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April
Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.
He added that output prices for durable consumer goods were rising at their fastest level on record.
China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.
Source: Economy - ft.com
