Chinese Producer Prices Post First Increase in Over Four Years

Gu'an, China

Contrary to expectations, producer prices in China rose in September for the first time in almost five years to help allay fears of investors about the health of the economy to an extent.

Data released by the National Bureau of Statistics (NBS) on Friday showed that the producer price index (PPI) in China edged up 0.1 last month from a year ago.

While the increase may appear quite negligible, it is the first positive reading of the index year-on-year since January 2012. The reading exceeded what had been predicted by analysts.

In a survey by Reuters, analysts had expected an improved reading but predicted a fall of 0.3 percent on-year, compared to the 0.8-percent decline seen in August.

The slight rise in the PPI would come as a relief to China’s government as it battles to deal with rising corporate debt and ease investors’ fears on the state of the economy. Chinese companies, majority of which are state-owned, are indebted to a tune of $18 trillion, according to the Bank for International Settlements. The total debt figure is equal to around 169 percent of the country’s gross domestic product (GDP).

Producer prices in China continued to inch up on a month-on-month basis last month. They rose by 0.5 percent to continue a trend that started over the summer.

Yu Qiumei, senior statistician at the NBS, said in a statement that the improvement in the PPI for September was, in part, as a result of higher prices in a number of key industries, such as ferrous metals metallurgy and coal mining.

Prices in the coal mining industry rose 4.1 percent year-on-year in September – the first rise posted since July 2012. A 10.1 percent rise from a year ago was recorded in prices of the ferrous metals metallurgy and rolling industry.

The number of industries in which price increases were seen rose by eight from the number in August to 25 last month.

The latest official data also showed that consumer prices rose in September, something that may further help to boost investors’ confidence. The consumer price index rose faster than expected by 1.9 percent year-on-year. It edged up 0.7 percent on a monthly basis.

A rise of 1.6 percent in the CPI was predicted my analysts.

“An uptick in inflation, if sustained, would be good news for China’s ability to service its overhang of corporate debt,” said Bill Adams, PNC Financial Service Group’s senior international economist, as reported by Reuters. “With low interest rates keeping debt service costs in check and producer prices rising, the outlook for Chinese industrial profits is improving.”

The higher consumer price inflation was driven mainly by higher food prices, which rose 3.2 percent on-year in September. That was more than double the 1.3 percent rise – the lowest in 10 months – recorded in the previous month.

Industrial production has been significantly hurt in China by producer price deflation of over four years, with slump in factory prices having been on since March 2012. Analysts say the profits of around a quarter of local companies in the first half of 2016 were too low for servicing their debt obligations.

Recent spending on infrastructure by the Chinese government has helped to drive a boom in the real estate market. Prices of building materials have risen as a result, with this contributing to the improved PPI.

The improvement seen in the latest official data suggests the People’s Bank of China may no longer go ahead with predicted interest rate or bank reserve ratio cuts.