“Chinese factory-gate inflation spirals to 12-year high” makes for great headlines, but a cursory look below the hood makes the story seem a bit more mundane.
One thing you should note about May’s PPI print out of China (Wednesday) is that the hype was such that it couldn’t help but be at least partially priced in, notwithstanding the contention that traders may start to expect higher rates.
PPI rose 9% YoY last month on the back of surging input prices, Beijing said Wednesday (figure below). That was hotter than expected. Consensus was looking for an 8.5% jump.
Consumer prices, on the other hand, rose just 1.3%, less than the 1.6% economists projected.
To quickly recap, there are two main concerns. First, domestic demand has lagged industrial output during most of China’s pandemic recovery. Attempts to pass along rising input costs to consumers could exacerbate the situation. Second, China is famously the “factory of the world,” so price hikes (to protect margins) could be fuel on the fire as the inflationary impulse builds in developed economies where demand is rising as activity normalizes alongside vaccine rollout and stimulus.
The gap between PPI and CPI in China is now near a record (figure below).
China has embarked on a campaign to rein in commodity prices. On Wednesday, the country’s economic planning agency pledged to ramp up the supply of consumer goods in order to keep prices stable for key items including corn, pork, vegetables and wheat.
Additionally, there’s talk of a cap on coal. “One idea under discussion… is to limit the price at which miners sell,” Bloomberg reported. “Another is to enforce a limit… on the benchmark price at the port of Qinhuangdao.” The linked article cited people familiar with the plans, all of whom declined to be named because they might be killed. I’m just kidding on that latter bit. I mean, I’m not really kidding, but officially, the sources gave the usual excuse for being off the record — “the matter isn’t public.”
When it comes to May’s PPI print, the nuance is important, and this is where I’d suggest (as I did here at the outset) that this is a bit more mundane than it looks at first glance. For one thing, China’s producers will probably just absorb most of this. Passing along these costs to consumers at home and abroad is untenable for a laundry list of reasons. In remarks to Bloomberg TV, ING’s Iris Pang called it “impossible.”
Additionally, the surge is likely to be transitory. That contention is a bit less of an eye-roller than it is in the US context. “Barring serious supply bottlenecks in the period ahead, we believe China’s PPI will likely peak in Q2 and moderate in H2, helped by easing positive base effects and policy efforts to rein in commodity price pressure, such as the recent policy announcement to ease steel production curbs in Tangshan,” SocGen’s Michelle Lam and Wei Yao said, adding that “the pass-through to downstream sectors remained fairly muted [in May], with consumer goods PPI only picking up modestly reflecting intense market competition and still fragile demand.” Note that core CPI rose just 0.9% last month.
And don’t forget, China is also engaged in an effort to reinvigorate the de-leveraging push. That involves reining in speculation in property and what amounts to a mandate that banks maintain lending at around the same level versus 2020. If banks adhere to the PBoC’s guidance, the pace of credit growth would slow to a 15-year low. China’s credit impulse turned negative last month. That’s not the most bullish development for commodities.
The bottom line is that this too shall (probably) pass. Rate hikes (of any kind) are still seen as unlikely when it comes to dampening price pressures. That said, it’s not exactly as if the PBoC would print flyers advertising such a move if it were in the offing. “The PBOC hasn’t given any near-term guidance that a policy tightening is imminent, but then it never does,” Bloomberg’s Mark Cranfield wrote. “The negative cost of carry to establish a view on higher swap rates is relatively modest [and] traders will feel emboldened to position for higher yields.”