China economy

China’s factory-gate inflation cools for third month in row as trade war makes impact

Gauge of industrial profitability slows year-on-year in September, in month when growth in factory sector stalled after 15-month expansion

PUBLISHED : Tuesday, 16 October, 2018, 12:41pm
UPDATED : Tuesday, 16 October, 2018, 11:19pm

China’s factory-gate inflation cooled for a third straight month in September amid ebbing domestic demand, pointing to more pressure on the world’s second-biggest economy as it remains locked in an intensifying trade war with the United States.

Consumer inflation, on the other hand, picked up slightly in September from the previous month, led mainly by higher food prices, official data showed on Tuesday.

Overall, pricing pressures were contained, giving authorities the flexibility to ease monetary policy to shore up slowing growth. Over the weekend, central bank governor Yi Gang said he saw plenty of room for adjustment in interest rates and banks’ reserve requirement ratio due to significant downside risks from the US-China trade row.

Indeed, economic activity has been slackening in the past few months, prompting the People’s Bank of China to announce another cut to banks’ reserve requirement ratio just over a week ago – the fourth reduction this year.

For this year, Yi said the consumer price index (CPI) would probably come in about 2 per cent and the producer price index (PPI) between 3 and 4 per cent.

The PPI, a gauge of industrial profitability, rose 3.6 per cent in September from a year earlier, compared with a 4.1 per cent increase in August, according to data released by the National Statistics Bureau (NBS) on Tuesday.

On a monthly basis, the PPI picked up to 0.6 per cent from 0.4 per cent in August.

Analysts polled by Reuters had expected September producer inflation would cool to 3.5 per cent as both external and domestic demand weakened.

Profit growth at China’s industrial firms slowed to a five-month low in August, fanning concerns about faltering domestic demand.

China’s factory inflation slows but consumer prices accelerate

The trade row with Washington appears to be already impacting industries. Growth in China’s factory sector in September stalled after 15 months of expansion, with export orders falling the most in more than two years, a private business survey showed. An official survey also confirmed a further manufacturing weakening.

Prices of raw materials rose 7.3 per cent in September from a year earlier, down from a 7.8 per cent increase in August, according to the statistics bureau.

The CPI rose 2.5 per cent from a year earlier, in line with expectations of 2.5 per cent and accelerating from August’s 2.3 per cent gain. It still remained comfortably below China’s inflation goal of 3 per cent for 2018, same as last year.

The core consumer price index, which strips out volatile food and energy prices, rose 1.7 per cent year-on-year, compared with 2.0 per cent in August.

The food price index increased 3.6 per cent in September, up sharply from the 1.7 per cent annual gain in September, due to extreme weather such as seasonal typhoons, heavy rains and hailstorms, according to the NBS.

China’s economic growth cooled slightly to 6.7 per cent in the second quarter, though worries about a sharper slowdown in coming quarters have increased in recent months given the rocky trade relations with the US.

Trade war’s tariffs may spur relocation of some Chinese textile factories to other Asian nations

The two countries have already slapped tit-for-tat tariffs on each other’s goods, and US President Donald Trump has warned that he was ready to slap tariffs on virtually all Chinese imports into the US.

If China goes ahead with a 15 per cent tariff on US$60 billion US goods, it could lead to a one-time impact of a 0.2-0.3 percentage point gain on China’s consumer inflation, according to estimates from Morgan Stanley.

“We expect headline inflation to hover around 2 per cent over the coming year, but upside risks have increased,” economists at Capital Economics wrote in a recent report.

“Developments in the real economy should help to keep a lid on inflationary pressures over the months ahead.”