China’s Producer Prices Surge in September

  • China’s Producer Prices Surge in September

Growing domestic demand and reduced industrial capacity in China increased factory prices in September.

The Produce Price Index climbed 6.9 percent year-on-year in the month, up from 6.3 percent in August. This is faster than the 6.4 percent forecast by economists in September.

Manufacturing PPI sub-index rose 7.3 percent, the highest in nine years. Aggressive reduction in capacity of steel and cement industries, coupled with growing demand have contributed to the increase in prices in the recent month.

The Chinese government in August announced it would reduce concentrations of airborne particles called PM2.5 by 15 percent year-on-year in 28 northern cities from October 2017 to March 2018 to meet smog targets. This aggressive cut amid strong economic momentum bolstered factory prices.

“The economy has pretty strong momentum now, monetary policy remained loose ahead of the 19th Party Congress, and the environmental cleanup has cut the supply of commodities,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “But this is not sustainable. Deleveraging will be moving up on the agenda after the congress.”

Meanwhile, Consumer Price Index increased by 1.6 percent, down from 1.8 percent recorded in August. While, prices of consumer goods climbed just 0.7 percent. Meaning falling food prices is still dragging on headline inflation and would likely compel the People’s Bank of China to maintain current monetary policy to better support the economy.

“Weak CPI means the PBOC has no pressure in pushing up policy interest rates, and perhaps gains a little bit more tolerance towards the softening rates in the interbank market,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “This doesn’t change the tune of financial deleveraging in China. With the Party Congress being concluded soon, I would expect a modest yet persisting deleveraging.”

Zhou Xiaochuan, the Governor of People’s Bank of China warned on Sunday during a panel discussion at a Group of 30 seminar in Washington held in conjunction with the International Monetary Fund that corporate debt in China is too high.

“We need to pay further effort to deleveraging and strengthen policy for financial stability,” Zhou said. Investors believe further credit control would lead to price increase and hurt exports of trading partners like Australia and New Zealand.

However, strong PPI reading showed the economy is pretty robust in the second half of the year with a moderate growing demand. The economy is expected to grow at about 6.8 percent in 2017.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

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