Business | Rising prices show Beijing's supply-side reforms working
Inflation driven by vegetables such as these.
Inflation driven by vegetables such as these.

Rising prices show Beijing’s supply-side reforms working

Coal, steel and nonferrous metals account for lion's share of inflationary pressure

October 14, 2016 8:11 PM (UTC+8)

Rising prices across Chinese factory floors and shopping centers indicate Beijing’s strenuous supply-side reforms are finally gaining traction after nearly a year in the works, as the outperforming CPI and PPI figures both help to ease concerns about the health of the world’s second-largest economy following weak export data yesterday.

The end of industrial deflation is also likely to boost overall manufacturing profitability as the two are highly correlated (see chart).

Chinese consumer prices rose at their fastest pace in four months in September with the headline CPI figure bouncing back to 1.9%, a level last seen in May, handsomely beating analysts’ expectations of 1.6%. Producer prices also rose 0.1%, turning positive for the first time in almost five years.

President Xi Jinping unveiled the grand strategy to revitalize the world’s second-largest economy through supply-side reforms at the Central Economic Work Conference last year. The plan aimed to unleash demand through winding down excess capacity and accelerating infrastructure projects.

The Energy Bureau plans to shutter 1,000 coal mines by the end of this year: coal is one of the industries most in focus under the reforms with a target to cut 500 million tonnes of surplus coal in the next five years.

The Producer Price Index in September gained 0.5% month-over-month, marking the fastest rate of increase since May. Price recoveries are occurring in a larger number of sectors, with 25 seeing positive price movements last month, compared with 17 in August.

The National Bureau of Statistics said that steelmaking, nonferrous metals and coal — three key sectors of supply-side reforms — contributed nearly 90% of the 90 basis point improvement in the headline PPI figure last month. On a sequential month-over-month basis, the mining sector experienced the most significant price movement, an increase of 2.9% over last month.

Upstream price recovery will likely feed through to midstream and downstream industries over time. Meanwhile, the growing benefits of supply-side reforms should also spread to the consumer space. The September CPI report shows that the substantial increase in the prices of consumer products and services was the biggest contributor to the gains last month. Noticeably, transportation and education costs jumped 2.8% and 2.1%.

Food prices were a major driving factor: vegetable prices jumped 10.7% and fruit rose 5%, as severe weather and seasonal factors affect production.

With reporting by Lin Wanxia, Poo Yee Kai & Benny Kung

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