China's factory inflation cools again in May as commodity prices ease further

Factory employees work at the main factory of Chinese smartphone maker Oppo in Dongguan.
Factory employees work at the main factory of Chinese smartphone maker Oppo in Dongguan. PHOTO: AFP

BEIJING (BLOOMBERG) - China's producer price gains moderated following further easing in commodity prices, signaling weaker overall inflation pressure in the pipeline.

Producer price index rose 5.5 per cent in May from a year earlier, compared with an estimated 5.6 per cent in a Bloomberg survey and 6.4 per cent increase in April. The consumer price index climbed 1.5 per cent, versus a prior gain of 1.2 per cent, the statistics bureau said on Friday (June 9).

Resurgent factory inflation since last year has moderated, in step with the faltering global commodity rally. Regulatory efforts to contain financial leverage may also weigh on property and infrastructure investment in the second half of the year, denting a crucial pillar for raw material demand. Global commodities sank to one-year low this week, which may further erode raw material prices for Chinese producers.

Earlier this year, vendors at the bi-annual Canton Fair in Guangzhou said in interviews that pricing pressures for key supplies and labor had eased. Makers of everything from camping equipment to wheelchairs expected that the worst is over for rising producer prices, which peaked in February with a 7.8 per cent rise after snapping four years of deflation last year.

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"China's factory reflation story is coming to an end," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. "As that happens, hopes for high industrial profits will fade and fears about a high debt burden will loom larger."

"Inflationary pressure is fairly muted for now," said Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp who accurately forecast both May CPI and PPI. He expects PPI to "hover around the current level for a while" before easing further this year.

"Fundamental demand remains lukewarm," said Zhou Hao, an economist at Commerzbank in Singapore who sees PPI falling near or below CPI this year. "Industrial corporations' profits have already peaked and things will become even more difficult."

Food price declines narrowed to 1.6 per cent versus a 3.5 pe rcent drop in April. Purchasing prices climbed 8 per cent compared with 9 per cent the prior month.

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