Why steady inflation is a boon for China

beijing — China’s factory price inflation held steady in July in a positive sign for industrial output and profits for the third quarter, even though a government-led drive to reduce debt is expected to cool earnings and economic growth by year-end.

China’s economy has expanded solidly this year as commodity prices recovered, helping boost the industrial sector, while mild consumer price gains have left policymakers room to manoeuvre should growth falter.

The producer price index (PPI) rose 5.5 per cent last month from a year earlier, unchanged from June, the National Bureau of Statistics (NBS) said on Wednesday. Analysts polled by Reuters had expected producer prices to hold steady for a third straight month at 5.5 per cent.

Analysts say given expectations of deeper capacity cuts heading into the winter months, keeping supply tight and prices up, operating margins for businesses will probably remain solid in a boost to the bottom line.

“We expect the PPI y/y to remain strong in the coming months, as the capacity reduction proceeds,” said David Qu, markets economist at ANZ in a note to clients. “The strong PPI indicates decent growth in corporate profits, especially for SOEs, leaving the authorities room for deleveraging,” he said.

On a month-on-month basis, the PPI rose 0.2 per cent in July, after three months in the red, with

5.5% jump in producer price index last month

the NBS attributing this to a rise in prices of commodities including steel and non-ferrous metals.

Prices of commodities futures including steel rebar began to rise again in June and have continued to surge through early August, underscoring concerns over tight supply amid pollution inspections and strong restocking demand.

China has eliminated around 120 million tonnes of low-grade steel capacity and 42.39 million tonnes of crude steel capacity in the first half of the year, equivalent to 84 percent of its target for the whole year.

Beijing has also ordered steel and aluminium producers in 28 cities to slash output during the winter heating season that starts in November to curb pollution, spurring local investors to anticipate gains for big producers when a shortfall bites.

Besides the capacity cuts, “the strong pipeline of infrastructure investment will continue to underpin material prices in the coming months,” ANZ’s Qu said.

Shares in state-run Aluminium Corp of China (Chalco) have surged 63 per cent since the start of July, while shares in Shenzhenlisted Yunnan Aluminium have rallied 67 per cent.