China factory prices falter; inflation nears 8-year high

A Walmart supermarket in Beijing in September. The China-US trade war and declining demand are taking their toll on China's manufacturing sector. Policymakers are racing against the calendar to meet China's annual growth target as the world's second
A Walmart supermarket in Beijing in September. The China-US trade war and declining demand are taking their toll on China's manufacturing sector. Policymakers are racing against the calendar to meet China's annual growth target as the world's second largest economy slows to the lower end of a 6 per cent to 6.5 per cent range for this year.PHOTO: REUTERS

Consumers hit mainly by surging pork prices, while slowdown in manufacturing also reflected in falling PMI

BEIJING • China's producer prices fell the most in more than three years last month, as the manufacturing sector weakened on declining demand and a knock from the Sino-US tariff war, reinforcing the case for Beijing to keep the stimulus coming.

The producer price index (PPI), seen as a key indicator of corporate profitability, fell 1.6 per cent from the same month last year, marking the steepest decline since July 2016, National Bureau of Statistics data showed yesterday.

Analysts had predicted a contraction of 1.5 per cent for the PPI.

In contrast, China's consumer prices rose at their fastest pace in almost eight years, driven mostly by a surge in pork prices as African swine fever ravaged the country's hog herds.

Some analysts say the rise in the consumer price index (CPI) could become a concern for policymakers looking to introduce measures to prop up demand.

However, core inflation - which excludes food and energy prices - pressures remain modest.

The factory deflation aligns with other indicators showing shrinking manufacturing activity last month, with the official Purchasing Managers' Index (PMI) indicating contraction for a sixth straight month.

While Washington and Beijing work on finalising the first part of a phased trade agreement, many analysts are wary of the potential back and forth after the sudden collapse of earlier talks in May.

Chinese manufacturers, meanwhile, are expected to face continued pressure from existing tariffs.

 
 
 
 

More United States tariffs against China are set to take effect on Dec 15, although officials from both countries said last week they have agreed to roll back tariffs on each other's goods if a "Phase 1" trade deal is completed.

Last Friday, though, American President Donald Trump said he has not agreed to the rollbacks sought by the Chinese.

The more-than-year-long trade war has cost China US$35 billion (S$47.3 billion) as the United States has cut down on Chinese imports, driving up prices for American consumers, according to a United Nations study published last Tuesday.

China, for the first time since 2016, cut the interest rate in its one-year medium lending facility loans. The Chinese authorities, though, have been relatively restrained in providing stimulus measures and the cut was by only five basis points.

But surging consumer inflation is adding to the headaches of policymakers, who are racing against the calendar to meet Beijing's annual growth target as the world's second largest economy slows to the lower end of a 6 per cent to 6.5 per cent range for this year.

Last month's CPI rose 3.8 per cent year on year, the most since January 2012, and beat analysts' forecasts of a 3.3 per cent hike.

The rise was driven largely by a steep climb in pork prices and other meats after African swine fever killed a large portion of China's pigs. Pork prices more than doubled year on year last month, according to the statistics bureau.

"Although we expect the People's Bank of China (PBOC) to maintain its easing policy stance, we believe there is elevated risk of a wage-price spiral amid surging pork prices and the spillover effects to other food prices," analysts at Nomura wrote in a note on Nov 1.

"Thus the PBOC could potentially become more reluctant to deliver high-profile policy stimulus in coming quarters to avoid fuelling inflation expectations," the analysts said.

A version of this article appeared in the print edition of The Sunday Times on November 10, 2019, with the headline 'China factory prices falter; inflation nears 8-year high'. Print Edition | Subscribe