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China's factory inflation cools as commodity prices ease

Jun 09 2017 09:11
Bloomberg News

Beijing - China’s producer price gains moderated following further easing in commodity prices, signalling weaker overall inflation pressure in the pipeline.

Key points

Producer price index rose 5.5% in May from a year earlier, compared with an estimated 5.6% in a Bloomberg survey and 6.4% increase in April. Consumer price index climbed 1.5%, versus a prior gain of 1.2%, the statistics bureau said on Friday.

Big picture

Resurgent factory inflation since last year has moderated, in step with the faltering global commodity rally. Regulatory efforts to contain financial leverage may also weigh on property and infrastructure investment in the second half of the year, denting a crucial pillar for raw material demand.

Global commodities sank to one-year low this week, which may further erode raw material prices for Chinese producers.

Earlier this year, vendors at the bi-annual Canton Fair in Guangzhou said in interviews that pricing pressures for key supplies and labor had eased. Makers of everything from camping equipment to wheelchairs said they expect that the worst is over for rising producer prices, which peaked in February with a 7.8% rise after snapping four years of deflation last year.

Economist takeaways

"China’s factory reflation story is coming to an end," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. "As that happens, hopes for high industrial profits will fade and fears about a high debt burden will loom larger."

"Inflationary pressure is fairly muted for now," said  Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp. who accurately forecast both May CPI and PPI. He expects PPI to "hover around the current level for a while" before easing further this year.

"Inflation in general is likely to be subdued this year, and is not an important factor driving macro policies," said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. "Recent monetary tightening is mainly geared to slow the pace of leverage."

Given the strong relation between raw materials, PPI, and import prices, "the dip in raw materials PPI indicates the reflation trade is at least stalling, if not outright dying, for Asia and the world," Vaninder Singh, an Asia economist at NatWest Markets in Singapore, wrote in a report.

"There are clear implications for the rest of Asia’s exports and we have seen some of this already materialize in Korean and Taiwanese exports dipping."

The details

Food price declines narrowed to 1.6% versus a 3.5% drop in April. Purchasing prices climbed 8% compared with 9% the prior month.

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china  |  commodities  |  manufacturing  |  inflation  |  economy

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