China producer inflation rises for first time in nine months

China’s factory-gate inflation picked up for the first time in nine months in March, lifted by price rises in global commodities as well as signs that government efforts to boost the economy may be putting a floor under domestic demand.

Consumer inflation also quickened, jumping to the highest since October 2018 as pork prices soared due to a growing epidemic of swine fever, official data showed on Thursday.

The step-up in producer inflation, while slight, will ease deflation worries and likely add to optimism that the world’s second-largest economy is starting to turn the corner. Recent surveys showed factory activity expanded for the first time in months in March.

But financial analysts urge caution, saying it will take a few more months of better data and further policy support from Beijing to see if a recovery can be sustained.

China’s producer price index (PPI) in March rose 0.4 per cent from a year earlier, driven largely by rapid rises in oil and gas prices, and advancing from a 0.1 per cent increase in February, the National Bureau of Statistics (NBS) said.

That was in line with analysts’ forecasts in a Reuters poll.

Most of the gain was in mining, with prices rising 4.2 per cent on-year, up from 1.8 per cent in February. Drops in raw material prices also moderated.

Beijing is fast-tracking more infrastructure projects, which is pushing up prices of construction materials.

Surging iron ore prices hit a record domestically on Tuesday, fuelled by concerns over tight global supply after disruptions to production and shipments at top miners in Brazil and Australia. Prices of steel reinforcing bars used in building hit a 7-1/2 year high this week.

But underlying demand in other parts of the economy still appears subdued. Prices of consumer durables fell for a second month, pointing to weakness in demand for big-ticket items such as cars and appliances.

“Looking ahead, we expect oil prices to fall back in the coming months. This will drag down PPI. Meanwhile, continued economic weakness is likely to keep a lid on broader price pressures,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

On a monthly basis, producer prices increased for the first time in five months. The index inched up 0.1 per cent, compared with a 0.1 per cent decrease in February.

The world’s second-largest economy is growing at its weakest pace in almost three decades amid weaker domestic demand and a year-long trade war with the United States. Multi-year campaigns to curb debt risks and pollution have deterred fresh investment.

Last month, the government announced nearly 2 trillion yuan ($297.27 billion) in additional tax cuts to ease the pressure on corporate balance sheets, while authorities are pressing banks to keep lending to struggling smaller firms.

Cuts in value-added tax (VAT) that kicked in on April 1 have already led authorities to reduce prices for electricity and natural gas. Retail gasoline and diesel prices are to be reduced as well.

A growing number of companies ranging from Apple Inc to BMW have lowered prices for their products following the tax cuts.

China’s yuan held steady on Thursday as investors moved cautiously ahead of further news on Sino-US trade negotiations and brushed off signs of a pick-up in inflation. The United States and China have largely agreed on a mechanism to police any trade agreement they reach, including establishing new “enforcement offices,” US Treasury Secretary Steven Mnuchin said on Wednesday. But the official did not say when or if US tariffs on $250 billion worth of Chinese goods would be removed, and declined to put a timeframe on the negotiations. Trade uncertainty hanging over the yuan has dampened trading activity, with the weekly trading volume at $96.45 billion as of midday on Thursday, compared with $126.8 billion for the whole of last week and about $164.6 billion the week before.

“The market has digested much of the progress from trade talks before this week,” said a trader at a foreign bank in Shanghai. “There are not a lot of events now that can move the exchange rate in either direction.” Spot yuan was changing hands at 6.7151 per dollar at midday, just 7 pips firmer than the previous late session close and 0.09 per cent softer than the midpoint. The People’s Bank of China set the midpoint rate at 6.7088 prior to the open, firmer than the previous fix of 6.7110.

Investors took in their stride Thursday’s China price data that has helped ease deflation concerns. Factory-gate inflation picked up for the first time in nine months in March, while consumer inflation jumped to the highest since October 2018. With little news from the trade talks, the yuan “may follow the US dollar a bit,” said a second Shanghai-based trader, who sees the yuan trading between 6.70 and 6.74 in the short run.

Reuters