China PPI Sees Biggest Spike Since 2008 as CPI Eases

(Beijing) — A main gauge of wholesale prices in China jumped to its highest level in nearly eight and a half years in February while consumer inflation fell to its lowest since the start of 2015, official data showed Thursday.

The surge in the producer price index (PPI) might have been fueled by speculation in the commodities markets, based on expectations of a supply crunch due to the Chinese government’s drive to reduce excess manufacturing capacity, analysts said. Meanwhile, the easing consumer price index (CPI) suggested private demand has remained fragile, they added.

The PPI, a measure of product prices at the producer level and a leading indicator of consumer inflation, increased 7.8% last month from a year earlier, the biggest increase since September 2008, when it surged 9.1%, according to data released by the National Bureau of Statistics (NBS).

The PPI has risen for six consecutive months since a 54-month losing streak ended in September, as international commodity prices recovered.

The CPI, a main measure of inflation based on prices at the consumer level, was up 0.8% in February year-on-year, down from a gain of 2.5% in January and the lowest since a flat 0.8% increase in January 2015, NBS data showed.

“The PPI appears to have been pushed up by the supply-side reform and speculation on commodities,” such as steel, iron ore and coal, Zhou Hao, an economist at Singapore-based Commerzbank AG, told Caixin.

China shed more than 65 million tons of steel capacity and 290 million tons of coal-mining capacity last year, sharply boosting prices of the products, according to official data.

Beijing has announced plans to further trim steel capacity by about 50 million tons and close at least 150 million tons of coal production capacity this year.

It will also suspend or postpone construction on or eliminate no less than 50 million kilowatts of coal-fired power generation facilities to tackle an electricity supply glut and “make room for clean energy.”

The divergence in the directions of the PPI and CPI likely meant that the profitability of downstream industries was squeezed as their raw material costs went up while prices of their products were hard to raise due to subdued market demand, Zhou said.

“It looks to me that private demand hasn’t had a real recovery,” he said. “Speculators have focused on the commodity market, not the stock market. Why? It is probably because they were still pessimistic about enterprises’ profitability.”

Sheng Guoqing, an NBS analyst, in a statement blamed comparison figures in February 2016 for distorting PPI and CPI readings last month, adding that dropping food prices also led consumer inflation to fall.

The PPI figure in February 2016 was negative and the low base effect last year accounted for 6.4 percentage points in last month’s PPI growth, Sheng said.

However, CPI held up well in February last year due to the Spring Festival and a cold snap, so the base effect had no contribution to last month’s result, Sheng said. Lunar New Year fell in January this year.

Declines in prices for food, particularly pork and vegetables, dragged down year-on-year CPI increase by 1.21 percentage points, Sheng said.

Analysts at investment bank China International Capital Corp. Ltd. expected the PPI to “stay elevated” in the coming months on “robust sequential momentum and continued broadening-out of reflationary impulse.”

CPI inflation, however, is likely to remain tame in the first half of this year thanks to the increasing supply of fresh food and grain, they said in a note.

The Chinese economy has shown strengthening resilience since the latter part of last year, growing at a surprisingly stronger rate of 6.8% in the last three months of 2016 than the 6.7% gain in the preceding nine months.

But economists are divided on whether the traction can be sustained. Many have expressed concern that possible corrections in the overheated property market, sluggish private investment and limited government financial resources to boost infrastructure investment may weigh on expansion this year.

Figures released by Chinese Customs on Wednesday showed that the country logged its first trade deficit in three years last month as imports jumped on soaring commodity prices while exports declined, adding uncertainties to economic growth prospects.

Premier Li Keqiang, in his government work report delivered on Sunday, announced that this year’s economic expansion target has been set at “around 6.5%, or higher if possible in practice,” the lowest goal in 25 years. It is also weaker than the actual growth of 6.7% in 2016.

Contact reporter Fran Wang (fangwang@caixin.com)