PBoC plays down surge in factory-gate prices

Signs of inflationary pressure could be building in China as consumer and producer prices in July recorded annual gains that surpassed estimates by economists, the latest official data shows.

However, the People’s Bank of China argued the price rises remained “controllable”.

The producer price index (PPI), surged again by 9% in July on an annual basis, following the 8.8% growth in June, the National Bureau of Statistics announced on August 9. Economists polled by Reuters had predicted inflation remaining steady at 8.8%.

The higher factory-gate prices were driven by soaring prices of commodities such as mining ores, coal and ferrous medals, the data shows.

Consumer price index (CPI) remains much lower, advancing 1% in July from a year earlier, the bureau says in another release. The result fell slightly behind the 1.1% rate China posted in June, but still ended higher than the market forecast of 0.8%.

Measures taken by China to temper the impact of material costs have taken effect, says Dong Lijuan, senior statistician of the National Bureau of Statistics.

China vowed to “stabilise” commodity markets in April and has imposed trading limits, warned against stockpiling, and sold state reserves of coal and metals since then. 

As a result, the prices of non-ferrous metal and steel inched downwards compared with June, while coal prices continued to rise on back of strong demands, Dong explains.

Prices of vegetables changed course to rise 1.3% in July, affected by typhoons and heavy rains, she writes. Floods hit China’s central province Henan in July, causing at least 302 deaths.

Inflation “controllable”

Despite the surging producer prices, the PBoC calls the inflation pressure “overall controllable” in a quarterly review report it published today (August 10), one day after the inflation figure release.

“There are no fundamentals to [form] long-term inflation or deflation [in China],” the central bank says in the report.

Swollen factory prices are a result of base effects, the benchmark has been volatile in the past, the bank says, adding that it anticipates a contraction in future.

As for consumer inflation, the central bank describes it as “mild” and expects the price growth to “fluctuate in a reasonable range” in the near term.

To keep “adequate liquidity” in the market in the second half of the year, the central bank will resort to various tools such as the reserve requirement ratio (RRR), the medium-term lending facility and open market operations, the PBoC says.

The central bank caught the market off guard when it cut the RRR by 50 basis points on July 9, effectively pumping 1 trillion yuan ($154 billion) into the Chinese lending market.

No tilt towards tightening

There is potential for the PBoC to further lower the RRR rate in the remainder of this year, says Larry Hu, head of China economics at Macquarie Group.

The central bank is expected to remain on the “relatively easing” path as consumer inflation in China stays muted, Hu says.

As the rise in the PPI is largely driven by prices in international markets, such as oil prices, the PBoC has less reason to “overreact”, he explains.

The central bank is unlikely to steer towards tightening in the second half, but it also unlikely to impose aggressive easing, such as cutting the prime lending rate, Hu adds.

China tends to use regulatory measures, rather than monetary policy, to address factory inflation, says Raymond Yeung, chief economist for Greater China at ANZ.

“The more imminent risk for China’s outlook is the emergence of the Delta variant,” he says.

The highly contagious strain has spread to a dozen provinces in China. Officials have re-imposed tough containment measures, tightening domestic travel restrictions and prolonging quarantines.

The full year outlook for China from ANZ remains unchanged for now, at 8.8% growth on-year, Yeung adds.