China factory-gate inflation hits 4-month high; food prices surge

China’s factory-gate inflation in April quickened at its fastest pace in four months, buoyed by higher commodity prices and as a sign demand to perk up, when Beijing rolls out more stimulus.

Consumer inflation also accelerated, jumping to the highest pace in six months, official data showed on Thursday.

China’s producer price index (PPI) in April rose 0.9 per cent from a year earlier, the quickest pace since December, driven largely by rapid rises in oil and gas prices, and advancing from a 0.4 per cent increase in March, the National Bureau of Statistics (NBS) said. Analysts polled by Reuters had expected factory gate inflation would nudge up to 0.6 per cent in April.

Analysts and investors are closely watching inflation gauges in China to see whether there has been real improvement in underlying demand, which would support industrial profits and investment.

The pick-up in producer inflation suggests the world’s second-largest economy may slowly be responding to support, as authorities seek to head off external risks such as trade tensions with the United States, which unexpectedly escalated this week.

However, some analysts remain concerned about the true state of the demand factors driving China’s economy.

“Looking ahead, higher food inflation will probably continue to push up CPI (consumer price index) in the coming months,” Capital Economics Senior China Economist Julian Evans-Pritchard said. “But with economic growth unlikely to stage a strong recovery and industrial commodity prices likely to drop back before long, we don’t anticipate much upside to PPI and non-food CPI.”

Most of the PPI gain was driven by ferrous metal ore mining, with prices rising 10.6 per cent on-year, up from 5.8 per cent in March.

To arrest a sharper slowdown of the economy, Beijing has fast-tracked big-ticket infrastructure projects, which are pushing up prices of construction materials.

China’s iron ore futures posted their fifth straight monthly gain for April while construction steel marked its best month since July 2018, fuelled by hopes that demand will remain firm as construction activities typically pick up in May and June when the weather is usually favourable.

Imports of copper, widely used in construction and manufacturing, also rose in April from March.

On a monthly basis, producer prices inched up 0.3 per cent, for the second consecutive month after a marginal step-up in March.

Stronger factory-gate price rises have bolstered profits for industrial firms, which saw earnings rebound from four months of contraction in March.

China’s economy posted surprisingly strong data in March, stoking debate over how much more stimulus China needs to generate a sustainable recovery, however, initial April readings have been more subdued.

The consumer price index (CPI) in April rose 2.5 per cent from a year earlier, a six-month high, fuelled by higher meat prices.

That was more than a 2.3 per cent increase in March and in line with market expectations.

On a month-on-month basis, CPI rose 0.1 per cent, compared with a 0.4 per cent drop the preceding month.

The food price index in April rose 6.1 per cent from a year earlier, marking the fastest pace in April 2016, and much higher than March’s reading of 4.1 per cent.

China’s monthly crude oil imports jumped to a record in April, and while it’s likely May will see a pullback, the broader question is how the world’s biggest importer is going to fare without supplies from Iran?

The market consensus in the wake of Wednesday’s customs data was that imports, which hit 10.64 million barrels per day (bpd), were boosted as Chinese refiners stocked up on Iranian crude ahead of the expiry of US waivers on purchases from Tehran.

While China customs will only provide a detailed breakdown of imports later this month, vessel-tracking and port data compiled by Refinitiv do lend credence to the stockpiling view.

China’s imports from Iran were assessed at 830,000 bpd in April, up strongly from 540,000 bpd in March.

However, imports from Iran look like they are falling off a cliff in May. Only one cargo has been delivered so far and a mere three more are expected, for a likely total of about 260,000 bpd.

These figures are subject to review and may increase. But given the sailing time of at least three weeks between Iran and China, the chances are that any new cargoes departing in the coming days won’t arrive in May, even if Chinese refiners were to buy more Iranian oil in violation of US sanctions.

In recent months China has accounted for about half of Iranian crude exports, meaning the loss of such a major customer will be a severe blow to Tehran. Of course, all commentary on Iranian oil exports must come with a caveat that it’s possible, and perhaps even likely, that not all cargoes are being captured by the various vessel-tracking services, and that some are being effectively hidden in a sort of black market for crude.

Reuters