China econ­omy re­flates as pro­ducer prices rise

Fac­tory-gate inflation hits 5-year high

Kuwait Times - - BUSINESS -

BEI­JING:

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.

Re­fla­tion Game

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

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