China producer deflation lowest in two years

A worker cuts steel billets at an iron and steel enterprise on June 9, 2014 in Ganyu County, China. China's consumer price index (CPI), a main gauge of inflation, rose 2.5 percent year on year in May, official data revealed on June 10. (Photo by ChinaFotoPress/ChinaFotoPress via Getty Images)©Getty

The steep fall in prices afflicting Chinese industrial groups slowed last month to its lowest rate in almost two years, as the prices of metals and coal started to rebound.

China’s industrial producer price index fell by 1.7 per cent in the year to July, government statistics showed on Tuesday, a relief compared with a 2.6 per cent pace the previous month and lows of 6 per cent deflation in the second half of last year.


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“Easing deflation bodes well for corporate earnings, particularly in upstream sectors,” said Larry Hu of Macquarie Capital, a financial advisory firm.

In an economy plagued by industrial overcapacity, corporate overleverage and a long-term growth slowdown, observers have been questioning how much longer China’s industrial profit growth can continue.

Industrial profits at large firms in China rose 5.1 per cent year-on-year in June, according to the National Bureau of Statistics.

According to the National Bureau of Statistics, the improvement in industrial deflation in Tuesday’s data compared with the previous month was largely the result of a rebound in prices of metal mining and processing, including steel. The prices of petroleum and natural gas extraction, and of coal mining, continued to rise.

In the long term, however, the uptick in steel prices is not likely to have a lasting impact on China’s PPI, said Tomas Gutierrez of Kallanish Commodities.

“Steel is generally looking stronger than expected but this is mainly due to low inventories and sustained exports, not really because of the fight against overcapacity,” he added.

Meanwhile Zhou Hao, senior economist at Commerzbank, warned that the data could undermine China’s economic reforms, as “rising steel and coal prices may slow down the rate of capacity cutting”.

China has come under fire from its trade partners for alleged dumping of excess steel on to the world market. The government has vowed to cut industrial overcapacity as part of its five-year-plan to 2020.

But the implementation of capacity cuts has been patchy, with several closed steel mills reopening this spring after the price of steel futures jumped.

China’s consumer price index continued to rise, with inflation at 1.8 per cent in the year to July, according to Tuesday’s data.

The continuing inflation faced by Chinese consumers, including in imported goods, was largely the result of high food prices. This year’s sky-high pork prices accounted for 0.42 percentage points of the rise in the headline figure, according to the National Bureau of Statistics. In addition, the prices of services such as education, leisure and medical care are rising.

Substantial inflation in consumer prices combined with steep deflation in corporate earnings has created an unhappy mix for Chinese consumers, whose wages are affected by corporate profits.

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