China manufacturing: ‘policymakers in a dilemma’ as factory-gate prices rise and producers feel the pinch

Some analysts say inflation is ‘largely controllable’, while others cut their full-year GDP growth forecast for China’s economy

Exports are also under pressure, as China is expected to more heavily scrutinise the cross-border movement of cargo due to its latest coronavirus outbreak

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With raw materials getting more expensive over the past several months, China’s factory-gate inflation rose by 9 per cent in July from a year earlier. Photo: AFP

Frank Tangin BeijingandSu-Lin Tanin Hong Kong

Published: 8:22pm, 9 Aug 2021Updated: 10:47pm, 9 Aug 2021

China’s persistent factory-gate price inflation and its diminishing growth in exports both point to an economic slowdown, but there is little risk that cost-of-living expenses will surge despite July seeing a slight uptick in consumer price inflation, based on the latest economic data.

Factory-gate price inflation – as measured by the producer price index (PPI) – rose by 9 per cent in July from a year earlier, according to the National Bureau of Statistics (NBS).

The PPI, which reflects the prices that factories charge wholesalers for their products, was a tad higher than the gain of 8.8 per cent in June.

At the weekend, new trade data also showed that Chinese export growth in July slowed, as expected. Exports grew at 19.3 per cent from a year earlier – down from the 32.2 per cent growth in June and slightly below expectations of 19.9 per cent.

Further pressuring trade, China is expected to more heavily scrutinise the cross-border movement of cargo and travellers due to its latest coronavirus outbreak – the country’s worst since Covid-19 was identified in Wuhan – and this could further strain supply chains while pushing up the prices of factory goods, Pinpoint Asset Management chief economist Zhang Zhiwei said in a note.

“This puts policymakers in a dilemma: [factory-gate] inflation is rising, and growth is slowing. The pandemic both worsened and caused more disruptions in the global supply chain,” Zhang said.

Despite largely recovering from disruptions caused by the coronavirus pandemic, China’s economic recovery is now losing steam, partly as a result of factory-gate price inflation. Manufacturers are still grappling with challenges such as higher raw material prices, surging logistics costs and global supply-chain bottlenecks, and these factors are curbing any interest in boosting output.

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