China Factory Inflation Holds Up on Steady Demand, Capacity Cuts

China’s producer price gains held steady on surging commodity prices, as demand stayed resilient and the government’s drive to reduce industrial capacity takes hold.

Key Points

  • Producer price index rose 5.5 percent in July from year earlier versus estimated 5.6 percent in Bloomberg survey
  • The consumer price index increased 1.4 percent, versus forecast of 1.5 percent and way below the government ceiling of 3 percent

Big Picture

Soaring prices of commodities such as coal, steel and cement extended a sweet spot for industrial firms, which have enjoyed solid profits and, through China’s massive supply chains, have underpinned global reflation since last year. The government’s drive to reduce industrial capacity capped supply of raw materials while demand from property and infrastructure projects has held up so far.

Economist Takeaways

Month-on-month producer price-growth turned positive from previous declines on the back of steel and nonferrous metal price rebounds, according to a statement by the NBS. Half of the 40 industrial sectors being surveyed have seen price gains in July, nine sectors more than the previous month, it said.

Producer prices are “bolstered by environment cleanup policies, the drive to cut capacity and a better outlook on the economy,” economist Xie Yaxuan at China Merchants Securities Co. in Hong Kong wrote in a recent note. “The ebb of PPI will remain gradual.”

“The rise in PPI suggests that corporate profitability should continue improving in the coming months, especially for upstream industries,” said David Qu, a Shanghai-based market economist at Australia & New Zealand Banking Group Ltd. “With the authorities’ strong determination for capacity reduction, it should continue to support the PPI” though the base effect still forms downward pressure year-on-year, he said.

“Demand in China and the world will moderate in the second half, ” said Carol Liao, an economist at JPMorgan Chase & Co. in Hong Kong, adding that consumer spending will drive the global economy for the rest of this year, which is less supportive to commodity prices than investment. “The commodity price surge is a short-term rebound and will face downward pressure.”

“It’s a sweet spot in terms of inflation,” Julia Wang, an economist at HSBC Holdings Plc in Hong Kong told Bloomberg Television.

The Details

  • Food prices fell 1.1 percent from a year earlier after a 1.2 percent decline in June
  • July non-food year-on-year inflation rate slows to 2 percent from 2.2 percent

— With assistance by Xiaoqing Pi, Kevin Hamlin, Yinan Zhao, and Miao Han

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