The price of goods leaving China’s factories has risen at its fastest pace since the financial crisis, piling pressure on policymakers as they grapple with the effects of a global commodity price rally.
China’s producer price index added 9 per cent in May, data from the National Bureau of Statistics showed on Wednesday, its biggest year-on-year increase since September 2008 and higher than economists’ forecasts.
The index has been rising sharply in recent months — gaining 6.8 per cent in April — driven by an international rally in commodities markets as well as a low base effect after being in negative territory for most of last year.
While consumer price increases remain low in China, the country’s soaring producer prices are set to increase costs for businesses and exporters at a time of mounting concerns over higher inflation in the US and around the world.
“Rising costs everywhere, in particular in China, will be adding to global inflationary pressures,” said Dariusz Kowalczyk, an economist at Crédit Agricole. “I think we are going to live with higher inflation globally, and what’s happening in China will contribute to that”.
Chinese PPI has been pushed higher by commodities and raw materials, which form a core part of the index. NBS data showed that prices in the ferrous metal smelting industry rose 38 per cent year on year, while those for coal mining added 30 per cent.
China’s strong industrial recovery, which drove record levels of steel production, has stoked a wider rise in commodity prices that is also supported by expectations of a global recovery and US stimulus. But the price increases have begun to alarm policymakers in China.
The Chinese government’s economic planning agency last month warned of “excessive speculation” in commodity markets and said it would crack down on monopolies and false information. Iron ore, which in May hit its highest level ever, tumbled on the news.
A state council meeting last month, chaired by Li Keqiang, China’s premier, also emphasised the need to prevent spillover into consumer prices, where increases have remained low, and have been driven by volatility in the cost of pork over the past year. Economists have said that high costs will instead squeeze profit margins at businesses, especially those selling directly to consumers.
Consumer prices in China rose 1.3 per cent in May, the most since September, but fell 0.2 per cent month on month, the NBS said. Pork prices, which have risen sharply in recent years on widespread culling because of African swine fever, dropped 24 per cent year on year.
China cut interest rates last year and has left them unchanged, though it has begun to gradually tighten credit conditions. Ken Cheung, chief Asian FX strategist at Mizuho, said that the flow of PPI to CPI was “rather mild and gradual” and that domestically, the People’s Bank of China should not rush to tighten its rate cycle.
But he suggested that “soaring PPI could fuel global inflation pressure given China’s significant shares in global trade”.
Delays at ports in southern China as a result of an outbreak of Covid-19 have also sparked fears of higher prices for Chinese exports, which have benefited from high demand in the US and Europe over the past year. Guangdong province has reported more than 100 cases since late May, leading the government to implement swift countermeasures.
China’s currency has risen steadily over the past year as well, recently touching three-year highs against the dollar. Louis Kuijs, head of Asia economics at Oxford Economics, noted last week that the strength of the renminbi meant that output prices for machinery were rising in dollar terms.
“Although China is not obviously exporting inflation in its own currency terms,” he noted, “from a US perspective rising prices of imports from China may start to feature in the debates about inflation there.”