China: rising producer prices not yet a threat
- Factory-gate prices climbed in April by the most since October 2017 on lofty commodities
- China plays a lesser role in exporting global inflation than in the years following the 2008 GFC
- Implications to our forecast: PPI to peak at around 8% mid-year and …
- … moderate thereafter as the low-base effect dissipates
- Implications for investors: PBOC to stick to its commitment of “no sharp turn in policy”
China’s producer price index rose 6.8% YoY, up from a 4.4% rise in March. The surge came amid a broader boom for commodities from copper to iron ore. Mining industries benefit the most, with producer prices in such industries accelerated to 24.9% YoY from March’s 12.3%. Meanwhile raw material prices jumped 15.2%, more than a 5.4% increase in manufacturing industries prices. It suggests that industrial firms in the upstream sectors stand to gain from higher factory-gate prices.
Producer prices of consumer goods lagged headline PPI inflation, with only a 0.3% rise. That indicates a very limited pass-through to consumer prices in the near term. Barring the resurgence of COVID-19, the recovery in household consumption should spur gains in service prices in the coming months, particularly for catering, travel, and entertainment. But the process will be gradual and moderate, as evidenced by the still low core CPI reading and the subdued durable goods prices. Falling food prices may also help keep inflation at bay as pork production continues to recover.
The risk of imported inflation should be manageable amid PBOC’s prudent stance. Efforts to restrain debt growth has already led to a significant slowdown in broad money supply. March’s total social financing growth also eased by 1.0pp to 12.3% YoY. China’s commodity demand is thus likely to soften in 2H21 in view of the moderation in the credit impulse and infrastructure investment.
Should inflation pressures gather further momentum, policymakers could roll out targeted measures to tackle the rising raw material prices. Reportedly, the China Iron and Steel Association is working with the Dalian Commodity Exchange to reform the delivery system to reduce market speculation. Other potential policies include a further tightening of credit growth from specific sectors and releasing certain metals stocks by the State Reserve Bureau. PPI inflation is expected to peak at around 8% mid-year and moderate thereafter as the low-base effect dissipates. We expect the PBOC to stick to its commitment of “no sharp turn in policy”.
Still, today’s print will likely stoke global inflation concerns given the positive correlation between China’s PPI and US’s CPI historically. One should, however, note that the recent commodity price upswing is largely a consequence of the recovery in advanced economies on the back of vaccination and gigantic spending bills. Tightening fiscal stimulus and property measures in the mainland means China will play a lesser role in exporting global inflation than in the years following the 2008 global financial crisis.
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