China economy

China factory gate inflation holds steady, consumer prices ease

PUBLISHED : Wednesday, 09 August, 2017, 10:50am
UPDATED : Wednesday, 09 August, 2017, 10:10pm

China’s producer price inflation held steady in July, with prices for key raw materials up slightly on expectations of deeper production capacity cuts going into the winter months of heavy pollution, while consumer inflation slowed slightly.

The producer price index rose 5.5 per cent last month from a year earlier, unchanged from June, the National Bureau of Statistics said on Wednesday.

China’s economy has posted solid growth this year as commodity prices recovered, helping boost the industrial sector, while mild consumer price gains have left policymakers room to manoeuvre should growth falter.

Analysts polled by Reuters had expected producer prices to hold steady for a third straight month at 5.5 per cent.

On a month-on-month basis, the producer price index rose 0.2 per cent in July, after three months in the red, with the bureau attributing this to a rise in prices of commodities including steel and non-ferrous metals.

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Prices of commodities futures including steel rebar used in construction began to rise again in June and have continued to surge through early August, underscoring concerns over tight supply amid pollution inspections and strong restocking demand.

China has eliminated about 120 million tonnes of low-grade steel capacity and 42.39 million tonnes of crude steel production capacity in the first half of the year, equivalent to 84 per cent of its target for the whole year.

Weaker factory price inflation could start to weigh on profits at China’s large – and often heavily indebted – industrial firms, who have benefited from a strong commodities reflation cycle over the last year.

Chinese policymakers have clamped down on expansion of the money supply and broad credit growth has also moderated, which could weigh on any further industrial recovery in China.

“The current level of consumer inflation is so mild that the PBOC [central bank] will be comfortable resuming the deleveraging process in the financial sector,” Iris Pang, ING economist wrote in a note ahead of the data.

“We expect the central bank to keep liquidity either as tight as in July or even slightly tighter, and push interbank interest rates higher, especially at the short-end to reduce leveraging activities by interbank participants, which include banks and non-bank financial institutions.”

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China’s consumer price index slowed slightly to 1.4 per cent in July from a year earlier, missing market expectations, the statistic bureau said.

Food prices, the biggest component of the consumer price index, fell 1.1 per cent from prior year.

Analysts had expected July consumer inflation to have remained unchanged at 1.5 per cent for the third month in a row.

China has set its inflation target at three per cent and economic growth of around 6.5 per cent this year, which suggests policymakers still have room to tighten controls to rein in financial risks from years of debt fueled stimulus.