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ECONOMY

Producer Price Index Posts Strongest Gain in Over Five Years

By Fran Wang

(Beijing) — A key gauge of wholesale prices in China rose at the fastest pace in more than five years in December, official data showed Tuesday, a development fueled by a surge in supply costs that analysts believe will be short-lived.

The producer price index (PPI) soared at a surprising 5.5% last month from a year ago, the National Bureau of Statistics (NBS) said in a statement.

It marked the highest reading since 6.5% in September 2011 and the fourth straight increase. The index had previously lingered in negative territory for 54 straight months until September on sluggish domestic demand, NBS data showed.

The December reading was also ahead of the median forecast of a gain of 4.6% in a Bloomberg LP survey.

Producer price rises normally filter through to consumer prices, though with a time lag, as retailers pass increased costs on to consumers.

On a monthly basis, December’s PPI was up 1.6%, accelerating from an uptick of 1.5% in November and the biggest increase since records became available in January 2011, NBS figures showed.

NBS analyst Sheng Guoqing attributed the jump to volatility in the yuan and Beijing’s policy to reduce industrial overcapacity, which has seen prices of raw materials spike on shrinking supply.

“The factory-gate prices of some industrial products were pushed up by multiple factors, including a rise in imported commodities due to the volatile exchange rate,” Sheng said in a separate statement.

The yuan’s central parity rate, which is set by China’s central bank, declined by more than 6% against the dollar in 2016. This fueled capital flight that was also spurred by pessimism about the country’s growth outlook. That in turn has made the Chinese currency-denominated assets less attractive to investors. In December alone, the yuan weakened by 5.9%.

The rate is under pressure to weaken further this year due to a stronger dollar and growing likelihood of more U.S. Fed interest-rate hikes.

“Industrial production and market demand grew steadily with the relation between supply and demand gradually becoming balanced, as effects of the policy to cut overcapacity and inventory kicked in,” Sheng said.

China has set a goal to get rid of up to 150 million tons of steel capacity by 2020 and cut 500 million tons in coal capacity within three to five years beginning from 2016. The goals are part of efforts to close down “zombie companies” and improve the efficiency of state-owned enterprises.

The PPI pickup is “welcome” because it would lead to more tax revenues and corporate income, Louis Kuijs, a Hong Kong-based analyst with research firm Oxford Economics, told Caixin.

But he cautioned that the increases may prove unsustainable because they were “highly concentrated” in sectors that were the targets of the government’s excess-capacity reduction campaign, and there has been “very little spillover” into other industries.

“I don’t really think that this is now heralding a sudden period of significant, generalized producer-price inflation in China,” he said.

“These heavy industry sectors are still subject to a lot of structural overcapacity. So the market mechanism will drive prices lower,” he said.

He predicted the PPI increase to ease after the first quarter of this year.

Liu Chang, an analyst with Capital Economics, also expected inflation to accelerate at the start of this year, “mainly driven by movements in commodity prices,” though they are “unlikely to be sustained.”

Sheng said price rises in the upstream industries of nonferrous metal smelting and pressing, coal mining, washing and dressing, oil and natural gas extraction, ferrous-metal smelting and pressing, and oil processing contributed to a combined 4.2 percentage points, or 76%, to the yearly PPI growth last month.

But the month-on-month increase in the coal sector prices was slower than November’s, after the government took measures since September to boost output and stabilize the market.

Nomura analysts Zhao Yang warned economic expansion remains under downward pressure despite rising inflation.

“The economic growth still faces headwinds from cooling property market,” he said in a note.

“Therefore, tightening monetary policy is not a good idea in our view. But rising inflation does add to risks of monetary tightening and policy mismanagement.”

For the full year of 2016, PPI declined 1.4%, an improvement from a decrease of 5.2% in 2015, according to the NBS.

The consumer price index (CPI), a main measure of inflation, rose 2.0% last year, up from a growth of 1.4% in the previous year but well below the government’s annual target of around 3%. In December, CPI gained 2.1%, NBS figures showed.

Contact reporter Fran Wang (fangwang@caixin.com)

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