China’s factories snap years-long deflation spell on Iran war price shock
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Manufacturers in China are already finding it difficult to pass on higher costs to buyers and could end up with even thinner profits.
PHOTO: REUTERS
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BEIJING – China’s factory-gate prices rose for the first time in more than three years in March, in an early sign that the war in Iran is feeding cost pressures into the world’s second-largest economy.
China had been trapped in a deflationary spiral since late 2022 as sluggish domestic demand and a manufacturing glut led to intense price wars that eroded company profits and slowed wage growth.
But economists warn that a shift to inflation driven by higher costs rather than stronger demand could leave Beijing boxed in, squeezing corporate margins, crimping growth and narrowing room for stimulus.
The producer price index increased 0.5 per cent from a year earlier, data from the National Bureau of Statistics (NBS) showed on April 10, ending a 41-month streak of declines driven partly by intense price-cutting by businesses in a phenomenon widely dubbed as “involution”.
The increase in producer prices is a result of “factors including a rapid surge in global commodity prices as well as an improved supply-demand relationship in certain domestic industries”, NBS analyst Dong Lijuan said in a statement accompanying the data release.
Producer prices surged in energy-intensive industries, with the non-ferrous metal mining sector recording a 36.4 per cent jump in March and non-ferrous metal smelting and processing posting a 22.4 per cent rise.
Although China is more immune to oil shocks after years of investment in renewables and efforts to secure stable supplies, the disruption of global energy flows by the conflict in the Middle East is still driving up costs for producers. China has already raised petrol prices three times by roughly a quarter since the war started.
Manufacturers are already finding it difficult to pass on the higher costs to buyers and could end up with even thinner profits.
In a sign of pressure on their profits, purchase prices of raw materials rose 0.8 per cent from a year ago – faster than the 0.5 per cent gain in their selling prices. While the petroleum and natural gas extraction sector saw prices rise 5.2 per cent, they declined 4.5 per cent in the refining industry, reflecting a slower transmission of cost increases to downstream sectors.
Consumer prices rose at a slightly slower pace in March. The consumer price index (CPI) ticked up 1 per cent year on year, compared with a 1.3 per cent rise in February.
On a monthly basis, CPI fell 0.7 per cent, compared with forecasts for a 0.2 per cent decline and following a 1 per cent rise in February.
Chinese consumers are feeling the pinch, with their transportation and communication costs becoming 0.9 per cent more expensive than a year ago – the fastest gain since January 2023.
The cost of energy needed to power vehicles rose 3.4 per cent in March, reversing a contraction of 9 per cent in the previous month. BLOOMBERG, REUTERS
