Rising producer price inflation points to renewed strength in China’s economy

Chinese producer price inflation accelerated more than expected to a four-month high in August, fuelled by strong gains in the price of raw materials prices, which points to strong, sustained growth for both factory profits and the economy.

The producer price index (PPI) rose by 6.3 per cent in August from a year earlier, up from 5.5 per cent in July, the National Bureau of Statistics said on Saturday.

Analysts polled by Reuters had expected the August producer price inflation rate to edge up to 5.6 per cent, its first pickup in six months.

On a month-on-month basis, the PPI rose by 0.9 per cent in August.

China’s industrial firms have been posting their strongest profits in years thanks to a government-led construction boom which has fuelled demand and prices for everything from cement to steel.

The country’s strong appetite for resources such as iron ore has helped fuel a reflationary pulse in the manufacturing sector worldwide.

But analysts continue to maintain that factory-gate prices will lose steam eventually as the government continues to clamp down on riskier types of financing, which is slowly pushing consumer and corporate borrowing costs higher.

China’s commodities futures markets have rallied hard this year and continued to surge through August. Strong restocking demand and government pledges to shut inefficient and highly polluting mines and plants have underscored concerns over supply heading into winter.

Activity in China’s steel industry expanded in August at the fastest pace since April 2016, reflecting high levels of production and low inventory.

With the industrial sector in high gear, China’s economy grew by a faster-than-expected 6.9 per cent in the first half of this year, turbo-charged by heavy government spending and massive bank lending last year.

That momentum plus strong August readings so far should allow Beijing to easily meet or beat its full-year growth target of 6.5 per cent.

Indeed, relatively steady growth through the rest of the year would see the world’s second-largest economy accelerate for the first time in seven years. Last year’s pace of 6.7 per cent was the slowest in 26 years.

China’s consumer inflation rate also rose more than expected to a seven-month high of 1.8 per cent in August, the bureau said, the first time it has accelerated in three months.

The consumer price index (CPI) had been expected to rise 1.6 per cent on-year compared with an increase of 1.4 per cent in July.

Food prices, the biggest component of the consumer price index (CPI), fell 0.2 per cent from a year earlier.

Non-food price inflation quickened to 2.3 per cent in August from 2 per cent in July.

Analysts had expected the CPI to rise 1.6 per cent from 1.4 per cent in July but remain well within the central bank’s comfort zone.