China's factory-gate prices jumped 10.0 percent in the year to July, the first double-digit rate since the mid-1990s, but many economists said the surge was unlikely to translate into a new burst of consumer inflation. China also reported a surprisingly large $25.3 billion trade surplus in July as both exports and imports beat forecasts, despite evidence that the global economic slowdown is spreading.
Investors chose to focus on the bad inflation news rather than the positive export figures, driving the Shanghai stock market down 5.2 percent to a 19-month closing low.
The statistics bureau blamed the inflation spike on high international energy and commodity prices - which are now falling sharply - as well as increases at home in oil and electricity prices that are administered by the government. Economists said one conclusion from the data is that it would be premature for Beijing to halt the appreciation of the yuan, which the central bank has allowed to decline against the dollar in the past two weeks after a 20 percent rise since 2005.
The leap in the producer price index, up from June's reading of 8.8 percent, dwarfed market forecasts of a 9.1 percent increase and was the highest rate since 1996, according to the National Bureau of Statistics.
Crude oil cost 41.2 percent more at the producer level than a year earlier; petrol was up 32.6 percent and coal 32.2 percent. Zhang Liqun, a researcher at the Development Research Centre, a cabinet think-tank, expressed confidence that price pressures at the wholesale level would not fuel consumer inflation.
"The relationship between supply and demand is fairly balanced and competition in the market for finished products is very tough," Zhang said in a commentary released by the NBS. The implication, as Zhang and other economists noted, is that manufacturers will have to accept lower profit margins to retain market share. That could eventually put wage and job growth at risk.
July's consumer price index, which has been falling from a 12-year peak of 8.7 percent scaled in February, will be released on Tuesday. Economists expect a reading of 6.5 percent. Tellingly, prices of consumer goods and foodstuffs at the producer level rose at a slower pace in July.
Beijing started the year with the twin goals of preventing inflation from taking root and the economy from overheating, but it shifted tack last month with a statement saying its priority now was to support economic growth.
Policy makers have been unnerved by the weakness of exports and the cash crunch facing smaller firms, which create most of the jobs in China. To help those sectors, the authorities have not only applied the brakes to the yuan's rise but also increased tax breaks for textile exporters and relaxed credit controls. Exports grew 26.9 percent in July from a year earlier, beating forecasts of an 18.1 percent rise.
For the first seven months, exports have grown 22.6 percent, down modestly from the 2007 pace of 25.7 percent. Annual import growth in July, at 33.7 percent, also outpaced market forecasts of 28 percent and testified to the strength of domestic demand in the world's fourth-largest economy.