China factory prices falter while inflation soars

Workers sort packages at a logistics center in Lianyungang, China. Chinese manufacturers are facing continued pressure from existing tariffs. (AFP)
Updated 10 November 2019

China factory prices falter while inflation soars

  • Manufacturing sector weakens on declining demand and fallout from the Sino-US tariff war

BEIJING: China’s producer prices fell the most in more than three years in October, as the manufacturing sector weakened on declining demand and a knock from the Sino-US tariff war, reinforcing the case for Beijing to keep the stimulus coming. The producer price index (PPI), seen as a key indicator of corporate profitability, fell 1.6 percent in October from a year earlier, marking the steepest decline since July 2016, National Bureau of Statistics (NBS) data showed on Saturday. Analysts had tipped a contraction of 1.5 percent for the PPI.
In contrast, China’s consumer prices rose at their fastest pace in almost eight years, driven mostly by a surge in pork prices as African swine fever ravaged the country’s hog herds. Some analysts say the CPI rise could become a concern for policymakers looking to introduce measures to prop up demand.
However, core inflation — which excludes food and energy prices — pressures remain modest.
The factory deflation was punctuated by falling raw material prices, including in the oil and gas extraction and ferrous metal smelting industries. It aligns with other indicators showing shrinking manufacturing activity in October, with the official Purchasing Managers’ Index (PMI) indicating contraction for a sixth straight month.
Zhao Wei, a macro analyst with Wuhan-based Changjiang Securities, said the drag from the real estate sector, which is suffering from a government crackdown on sales speculation and policy tightening on financing for developers, will also become more pronounced.
“Looking ahead, while a low base from last year will provide some support in the next few months, PPI deflation is likely to continue as overall demand is still under pressure,” said Zhao.
“The PPI may continue to be within a negative growth range.”
While Washington and Beijing work on finalizing the first part of a phased trade agreement, many analysts are wary of the potential back and forth after the sudden collapse of earlier talks in May. Chinese manufacturers, meanwhile, are expected to face continued pressure from existing tariffs.

FASTFACT

The more than year-long trade war is estimated to have cost China $35 billion.

More US tariffs against China are set to take effect on Dec. 15, although officials from both China and the US said this week they have agreed to roll back tariffs on each others’ goods if a “phase one” trade deal is completed.
On Friday, though, President Donald Trump said he has not agreed to the rollbacks sought by China.
The more than year-long trade war has cost China $35 billion as the US has cut down on Chinese imports, driving up prices for American consumers, according to a UN study published on Tuesday.
To drive down funding costs and boost the economy, China for the first time since 2016 cut the interest rate in its one-year medium lending facility (MLF) loans. The Chinese authorities, though, have been relatively restrained in providing stimulus measures and the cut was by only 5 basis points.
But surging consumer inflation is adding to the headaches of policymakers who are racing the calendar to meet Beijing’s annual growth target as the world’s second largest economy slows to the lower end of a 6 percent-6.5 percent range for 2019.
October’s consumer price index (CPI) rose 3.8 percent year-on-year, the most since January 2012 and beating analysts’ expectations for 3.3 percent rate.
Core CPI for October remained benign at 1.5 percent. For the full year of 2019, China is aiming for a CPI target of around 3 percent. It rose 2.6 percent in the January-October period.
“Although we expect the
People’s Bank of China (PBOC) to maintain its easing policy stance, we believe there is elevated risk of a wage-price spiral amid surging pork prices and the spillover effects to other food prices,” analysts at Nomura wrote in a note on Nov. 1.
“Thus the PBOC could potentially become more reluctant to deliver high-profile policy stimulus in coming quarters to avoid fueling inflation expectations,” the analysts said.


Aramco chief sees demand for oil staying above 100m barrels

Updated 23 January 2020

Aramco chief sees demand for oil staying above 100m barrels

  • A panel on the global energy outlook at the WEF in Davos heard that renewable energy alone would not be able to meet rising demand for power as more people moved into the middle class
  • The panel also heard that coal, not oil, remained the biggest source of carbon emissions

DAVOS: Aramco CEO Amin Nasser said he expected global oil demand to stay above the 100 million barrels threshold as the rise of the global middle class spurred demand for energy.
A panel on the global energy outlook at the World Economic Forum in Davos heard that renewable energy alone would not be able to meet rising demand for power as more people moved into the middle class.
“There will be additional demand and the only way to meet it is if you continue to provide affordable, reliable and viable energy to the rest of the world,” said the Aramco CEO.
“There is good penetration from renewables and electric cars are picking up however you need to consider what is happening in the world. There are still an additional 2 billion people coming. There are currently 3 billion people using biomass, animal dung, kerosene for cooking and there are 1 billion people today without electricity and almost 50 percent of people have never flown in an aeroplane.”
The panel heard that coal, not oil, remained the biggest source of carbon emissions but that the location of many coal-fired power plants in developing Asian economies meant that reducing its impact was a major challenge.
“The number one source of emissions by far is the coal fire power plants – they alone are responsible for one third of emissions,” said International Energy Agency Executive Director Fatih Birol. “But they are in many cases the number one source of electricity generation in low income countries - so this is not a black and white issue.”