Cold front sends shivers down China’s industrial backbone
Factory level inflation has cooled more than expected in April, adding to the quickly expanding list of economic indicators that suggest the world’s most populous country is facing a stiffer ascent ahead
Factory level inflation in China cooled more than expected in April, adding to the quickly expanding list of economic indicators that suggest the world’s most populous country is facing a stiffer ascent ahead following a blockbuster first quarter, which generated nominal growth nearing 12%.
While the latest CPI figure is only marginally higher than the consensus forecast of 1.1% as polled by Bloomberg, the majority of economists were caught out by the large pullback in the PPI as the median estimate was looking for a 6.7% rise.
The producer price index in China fell to 6.4% in April, down from the previous reading of 7.6%, as rapid price corrections in the upstream industrial materials space sank in.
On a month-to-month basis, Chinese factories saw overall selling prices pulling back by a whopping 0.4%, the first drop in 10 months and its biggest fall since January 2016.
Since the PPI has a very close relationship to the overall fortunes of China’s manufacturing-based secondary economy, which makes up roughly 40% of the annual GDP, April’s inflation report is sending chilling shivers down the outlook for the hot summer months in front of us.
Prices of steel and iron ore have tumbled since the end of March. Hence, there should be no surprise to see sector level PPI for ferrous metals melting, iron-ore mining and chemical manufacturing all making a huge U-turn in April, dropping by 3.1%, 2.6% and 1.3% during the month, respectively.
The slump in crude prices meant the oil and gas sector saw output price decline accelerating to minus-4.2% from March’s minus-0.1%.
The consumer price index gained a modest 1.2% from a year ago, recovering some lost grounds from the steep slumps seen during February (0.8%) and March (0.9%) as the prices of food and services edged up, but the overall CPI remains far from the 3% inflation target set by the State Council this March.
Non-food related inflation was up slightly on the month, with services CPI up 2.9% in April from 2.7% in March, led notably by rises in tour and travelling tariffs ahead of the holiday season stretching from late April into early May. Healthcare and tourism inflation stood at 5.7% and 4.2%, respectively, up from 5.3% and 3.1% in March.
Deflation in the food basket receded in April to just minus-1.8% from March’s minus-2.4%, following smaller, albeit still declining, prices for everyday consumables like vegetables, meat and eggs.
Nevertheless, the sharply lower farmed food prices this year is still leaving China’s primary economy in its worst recession in over two decades.