China Economy

China Economy

Positive signs as China’s prolonged industrial deflation finally ends after demand grows for coal, steel

Numbers have risen after 54 months, with producer price index increasing 0.1 per cent compared with September last year

PUBLISHED : Friday, 14 October, 2016, 10:37am
UPDATED : Friday, 14 October, 2016, 10:31pm

Factory gate prices unexpectedly rose in September – ending a period of industrial deflation that lasted for 54 months as demand for industrial goods, including coal and steel, recovered in the world’s second biggest economy, official data showed on Friday.

A rise in industrial prices is a sign of an improved business climate for China’s factories, which have been struggling with lower selling prices of their products in the past four and half years.

Li Keqiang hails third-quarter performance as China economy steps out of slump

Mainland banks have pumped an unprecedented amount of credit into the economy in recent years, but the funds were often sucked up by state-backed companies to repay debts and to inflate asset prices, leaving the nation’s vast number of factories and manufacturers struggling amid razor-thin profit margins and weak demand.

The index’s return to positive territory is a good sign. It shows that economic recovery is gaining a firmer footing, as we have seen since August
Gao Yuwei, Bank of China researcher

However, the September data shows that the situation has started to change.

“The index’s return to positive territory is a good sign,” said Gao Yuwei, a researcher at the Bank of China. “It shows that economic recovery is gaining a firmer footing, as we have seen since August.”

The producer price index, or PPI, increased 0.1 per cent year-on-year in September from the same month a year earlier after a fall of 0.8 per cent in August and a decrease of 1.7 per cent in July, the National Bureau of Statistics said. The PPI has been in negative territory since March 2012.

Consumer inflation rise picked up to 1.9 per cent in September, when compared with 1.3 per cent in August.

The price data partly confirmed Premier Li Keqiang comments made earlier this week that China’s third-quarter economic performance was better than expected with a surveyed jobless rate in major cities in September falling below 5 per cent for the first time in years.

As China’s consumer inflation remains within the 3 per cent annual target, market watchers have focused more on industrial prices to gauge the state of the economy as the changes are relevant to industrial firms’ profitability and accordingly affect their investment demand.

Zhou Hao, an economist at Commerzbank in Singapore, said he expected the producer prices to pick up growth to 1.5 per cent by the year’s end thanks to ongoing momentum.

The surprise rise in factory gate prices – the cost of finished goods sold by manufacturers and distributors – was a welcome positive sign that deflationary pressure was fading and would reduce the chances of the central bank introducing further easing measures, although inflation was still a remote threat, Zhou said.

Julian Evans-Pritchard, an economist at Capital Economics, said in a research note that the mild inflation this year would allow policymakers to “focus on more pressing issues such as financial stability and structural reform”.

Deflationary pressures to continue ‘haunting China’s economy’ this year: economists

Economists said China’s central bank would keep its monetary policy stance unchanged.

Any further immediate loosening was unlikely considering the asset-bubble concerns, and further tightening was also not expected as Beijing would keep its current policy to consolidate growth momentum.

Over a nine-day period ending on October 8, as many as 21 major cities, including Shanghai and Nanjing, rolled out housing tightening measures to put a brake on high-flying home prices, following an order believed to have come from President Xi Jinping.