China producer prices rise as industrial sector leads recovery

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The price of goods leaving China’s factories rose for the first time since the start of the coronavirus outbreak, driven up by rising costs for raw materials as the country’s economic recovery gathers pace.

The producer price index, which had fallen year on year in every month since February 2020, rose 0.3 per cent in January against a year earlier. It contrasted with a decline in the consumer price index, which fell into negative territory for the second time in three months.

The price data is a further indication of the pace of activity in China’s industrial sector, which has been the engine behind its world-leading recovery from the pandemic over much of the past year.

In China, “demand for metal products, for cement, for oil products, has been quite high for some time because of a boom in construction in the property sector”, said Jingyang Chen, an economist for greater China at HSBC.

Dong Lijuan, a senior statistician at the National Bureau of Statistics, said areas contributing to higher prices compared with a year earlier included ferrous metals and coal mining.

“From a month-on-month perspective, domestic demand continued to improve,” he added, pointing to growth of 1 per cent.

Exports have also driven China’s recovery, recording double-digit growth over the past three months. Over the lunar new year, factories are offering staff incentives to work through the holiday.

The consumer price index, which has remained low in part because of pork prices but also on the back of caution from households, fell 0.3 per cent.

Core inflation, which excludes food and energy, turned negative for the first time in more than a decade, though the reading was affected by the timing of the lunar new year, which typically boosts consumption and last year came in January rather than February.

Over recent months, persistent weakness in China’s inflation has posed a conundrum to policymakers grappling with higher asset prices and a rapid economic recovery after cutting key rates last year.

Gross domestic product increased 2.3 per cent last year but in the fourth quarter, the growth rate surpassed the level before the coronavirus struck.

Economists at Capital Economics said price pressures were likely to pick up further in the coming quarters and forecast CPI would hit 2 per cent by the end of the second quarter.

“That shouldn’t alarm the PBOC but will provide reassurance that they are right to focus on controlling credit risks. As such, we think the PBOC will tighten policy this year,” they noted.

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