China factory gate prices rise at fastest rate since 1995

Factory gate prices in China rose at their fastest pace in more than a quarter of a century as record coal prices intensified inflationary pressures on businesses and manufacturers.

The producer price index rose 10.7 per cent in September compared with a year earlier, official data showed on Thursday, the highest rate of increase since 1995. In August, PPI added 9.5 per cent.

Soaring global commodity prices have pushed factory gate prices in China sharply higher this year, with a shortage of coal compounding an energy crisis and leading to calls from the government for higher production.

The country’s producer prices increases, which in September were also boosted by base effects in 2020, have been closely watched at a time when higher inflation in the US has sparked concern among policymakers.

But the figures have not yet fed through into consumer prices in China, which in September rose just 0.7 per cent, a lower pace than in August.

Apart from a potential spillover to Chinese consumers, producer prices have also raised worries over higher costs for the country’s manufacturing sector, which helped drive its rapid recovery from the coronavirus pandemic but is now under pressure from power shortages.

“We think the risk of stagflation is rising in China as well as the rest of the world,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “The ambitious goal of carbon neutrality puts persistent pressure on commodity prices, which will be passed to downstream firms”.

Trade data released on Wednesday revealed that China’s imports of coal surged 76 per cent year on year in September as it tried to ease shortages that have led to power rationing at factories and businesses. The data also showed resilient trade despite the energy issues, with exports rising 28 per cent in dollar terms year on year in the same month.

The government has grappled with rising commodity prices after announcing a goal last year to reach carbon neutrality by 2060. A state meeting in May chaired by Li Keqiang, China’s premier, announced that important coal companies would be “encouraged to raise production”, while last week authorities in Inner Mongolia ordered increased output.

Sheana Yue, assistant economist at Capital Economics, said there were few signs that power shortages were pushing up prices of finished consumer goods, adding that factory gate inflation in China “won’t stay this high for long”. 

“Sooner or later, coal and metal prices are likely to drop back as property construction slows,” she said.

In addition to energy shortages, China’s economy is under pressure from a slowdown across its vast real estate sector and financial struggles at some of its biggest property developers including Evergrande, which this week missed interest payments on dollar-denominated bonds.