China economy

China factory inflation slows, hinting at dip in industrial sector profits

Any weakening in profitability at mainly state-owned ‘smokestack’ industries would give them less cash to pay off their debts, a key policy goal for Beijing

PUBLISHED : Friday, 09 March, 2018, 1:00pm
UPDATED : Friday, 09 March, 2018, 9:19pm

China’s producer price inflation eased to the slowest pace in 15 months in February as the cost of raw materials and other inputs rose at a milder pace, pointing to a potential softening in industrial sector profits.

Consumer inflation picked up to highest since November 2013, however, largely due to higher food prices as China celebrated the long Lunar New Year holiday, official data showed on Friday.

Data from China early in the year is typically treated with caution by economists due to business and price distortions caused by the timing of the week-long Lunar New Year celebrations, which fell in late January 2017 but started in mid-February this year.

Analysts expect investors may not get a clearer picture of China’s economic health until first-quarter data is released in April.

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The producer price index rose 3.7 per cent in February from a year earlier, compared with 4.3 per cent in January, the National Bureau of Statistics said on Friday.

China’s factory-gate inflation has now softened for four months in a row, suggesting that profits for miners, steel makers and manufacturers will start to moderate after surging to their strongest levels in years in 2017.

That would give the country’s “smokestack” industries, which are dominated by state-owned giants, less cash flow to service and pay down their debts, a key policy goal for Beijing.

Analysts polled by Reuters had expected February producer inflation would cool to 3.8 per cent from January’s 4.3 per cent.

On a month-on-month basis, the PPI fell 0.1 per cent.

For the combined period of January and February, PPI rose four per cent from a year ago.

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The consumer price index rose 2.9 per cent from a year earlier, more than expectations and quickening from January’s gain of 1.5 per cent. Analysts had expected a pick-up to 2.5 per cent.

On a month-on-month basis, the CPI rose 1.2 per cent.

CPI rose 2.2 per cent for January-February period.

The core consumer price index, which strips out volatile food and energy prices, rose 2.5 per cent in February, faster than 1.9 per cent in January.

“The year-on-year increase in CPI is expected to ease in March as holiday effects recede,” Sheng Guoqing, a statistics bureau official said in a commentary accompanying the data release.

The food price index rose 4.4 per cent from a year earlier due to a low base last year, after falling 0.5 per cent in January. Non-food prices rose 2.5 per cent, compared with two per cent in the previous month.

Much of the pick up in consumer prices was probably due to higher food and travel costs during the long holiday.

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As widely expected, China announced a 2018 consumer inflation target of “around three per cent”, in line with last year, at its annual parliament meeting that started this week.

But most analysts do not expect retail inflation to reach that level, even though higher producer prices over the last year are slowly percolating through to consumers. Consumer inflation last year softened to 1.6 per cent despite forecast-beating economic growth.

Producer inflation is expected to continue to moderate in coming months as property investment cools, reducing demand for products from steel and cement to appliances and furniture.