China's producer prices jumped more than expected in October as prices of coal and other raw materials surge in the midst of a supply crunch and a pickup in the economy. Consumer prices also beat expectations, accelerating to a six-month high, though analysts say the room for further rises is limited.
"We think producer price inflation will recover further in coming quarters but will top out at a little over 4 percent y/y before dropping back again," Capital Economics economist Julian Evans-Pritchard said in a note. "The scope for further rises in consumer price inflation is likely be more limited given that credit growth has begun to slow, house prices are starting to cool and farmers have responded to high pork prices by boosting pig supply."
With producer prices pulling out of nearly five years of deflation and the economy showing broad signs of stabilisation, pressure on Beijing to support growth has eased, with the policy focus now on controlling asset bubbles and other risks. Factory prices rose 1.2 percent on-year, the fastest pace since December 2011, after turning marginally positive in September for the first time in nearly five years, the National Bureau of Statistics (NBS) said on Wednesday.
The reading handily beat forecasts for a 0.8 percent rise, with the increase led by higher prices for companies involved in the production and processing of raw materials. On a month-on-month basis, producer prices rose 0.7 percent.
Coal prices in China are in the midst of a months long rally, with prices hitting fresh records on an almost daily basis in recent weeks after government-enforced closures tightened supplies for utilities, triggering a scramble for raw materials ahead of the winter. Stronger factory prices have helped boost industrial profits, relieving some pressure on companies squeezed by higher costs and weak demand, though there are concerns some of the gains are due to speculation and are not sustainable.
Improved cash flows should also give companies more room to service heavy debt loads, a key concern for the government. Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP), according to the most recent figures from the Bank for International Settlements. Most of it is held by state-owned companies.
China's consumer prices also rose in October, increasing at the fastest pace since April as food prices picked up. The consumer price index (CPI) rose 2.1 percent in October from a year earlier, compared with a 1.9 percent increase in September. Analysts had expected a 2.1 percent gain. A jump in food prices fuelled faster consumer inflation. Food prices rose 3.7 percent, compared with a 3.2 percent gain in the previous month.
Non-food prices inched up 1.7 percent versus September's 1.6 percent gain. On a monthly basis, consumer prices fell 0.1 percent. Prices for health care rose 4.8 percent, the fastest-rising CPI sub-category. China's producer price index is expected to continue to increase year-on-year in the coming months, statistics bureau spokesman Sheng Laiyun said in late October.
"I believe PPI in the coming months will continue to show positive growth year-on-year, but it could be volatile month-on-month," Sheng told a group of foreign reporters. Factory activity increased at the fastest pace in over two years in October, China's official purchasing manager survey showed last week. The rebound in pricing power may be reaching its limits, however, as prices of some materials surge to multi-year highs and a property boom shows signs of peaking.
China's main commodity exchanges have even launched a series of fee hikes and margin increases for some of their most volatile, niche contracts from coke to glass as authorities cracked down on speculation that is fuelling a surge in prices. Data from industry consultancy Custeel.com suggested steel mills have been cutting output and even starting maintenance work earlier than usual as soaring costs for raw materials such as iron ore and coking coal squeeze profits.
Data on Tuesday showed China's imports of iron ore, crude oil, coal and copper all fell in October. China's economy expanded at a steady 6.7 percent in the third quarter and looks set to hit Beijing's full-year target, fuelled by stronger government spending, record bank lending and a red-hot property market that are adding to its growing pile of debt.
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