China economy reflates as producer prices rise
Factory-gate inflation hits 5-year high
China’s producer prices rose at the fastest pace in more than five years in November as prices of coal, steel and other building materials soared, boosting industrial profits and giving firms more cash flow to pay off mountains of debt. The stronger-than-expected 3.3 percent surge in prices, along with upbeat factory readings from China, the United States and Europe, add to views that the global economy may be slowly reflating again thanks to a pick-up in industrial activity.
“This (the PPI jump) confirms our view that China has emerged from a multi-year deflationary trap,” ANZ said in a note. While some heavy industries such as coal mining, steel mills and metal processors saw the biggest rebound, official data yesterday showed the price recovery was also becoming more broad-based, with more sectors emerging from deflation.
Consumer inflation also picked up more than expected to 2.3 percent from a year earlier, the highest since April, due to higher food prices. Though the price gains were modest, they reinforced views that the central bank will be in no rush to loosen monetary policy again anytime soon, and even fueled speculation as to when the People’s Bank of China may start tightening conditions. China’s central bank has not cut interest rates since October 2015, when worries about deflation were more pressing, opting instead for regular injections of funds into the financial system and targeted infusions of cash into the weakest parts of the economy, such as rural areas.
“While there remains no immediate pressure on the central bank to raise interest rates, the uptick in inflationary pressures in November, combined with downward pressure on the renminbiexchange rate, highlight the risk that monetary policy tightening may begin earlier than The EIU currently expects,” said Dan Wang, China analyst at The Economist Intelligence Unit. Wang currently expects the PBOC will start to raise interest rates from the fourth quarter of next year.
Analysts polled by Reuters had expected producer prices to rise by a more modest 2.2 percent, up from 1.2 percent in October, while consumer prices had been expected to pick up marginally to 2.2 percent from 2.1 percent. “Today’s data shows future (PBOC) easing is even less likely. I don’t see any need for a RRR cut,” Capital Economics’ China economist Julian Evans-Pritchard said, referring to a cut in banks’ reserve requirements.
“With what is going on with China’s declining foreign reserves, if PBOC injects liquidity to replenish it, it is already kind of tightening without having to resort to such high-profile measures,” he said, adding that the PBOC has plenty of tools at disposal to adjust liquidity in the market. The central bank said in its thirdquarter monetary policy implementation report it will maintain ample liquidity in the financial system while taking steps to prevent asset bubbles in an increasingly leveraged economy.
China’s producer prices rose in September for the first time in nearly five years thanks to a rebound in commodity prices. A construction boom led by higher government spending and a blistering housing market rally have boosted prices for materials from steel and copper to glass and cement, with speculators adding fuel to a monthslong rally in China’s commodity futures markets. Government efforts to reduce excess capacity in industrial and mining sectors have also buoyed prices by creating shortages in some areas, such as coal. That helped boost industrial profits 9.6 percent in October from a year earlier.
Chinese steel and iron ore futures rose for a sixth straight session on Friday, spurred by upbeat trade data on Thursday and worries over tighter supply as Beijing intensifies efforts to cut excess steel capacity. Futures prices for steel reinforcement bars used in construction have surged to 31-month highs, while iron ore is at its strongest since late 2014.
China’s November imports expanded 6.7 percent on-year, the fastest in more than two years, as factories replenished inventories of raw materials, helping to lift commodity prices globally.—Reuters
HANGZHOU, China: People buy meat at a supermarket in eastern Zhejiang province yesterday. — AFP