China's July factory price growth quickens, adds to business cost pressures

BEIJING (Reuters) -China’s factory gate inflation in July rose at a faster clip from the previous month and exceeded market expectations, adding to strains on an economy losing recovery momentum as businesses struggle with high raw material costs.

FILE PHOTO: A worker works at Xunxi factory, which is an affiliate of Chinese e-commerce giant Alibaba, during a media tour, in Hangzhou, Zhejiang province, China November 10, 2020. REUTERS/Aly Song/File photo

The world’s second-biggest economy is on track to expand more than 8% this year but analysts say pent-up coronavirus demand has peaked and forecast growth to moderate over the next year.

The producer price index (PPI) grew 9.0% from a year earlier, matching the high seen in May, the National Bureau of Statistics (NBS) said in a statement on Monday. Analysts in a Reuters poll had expected the PPI to rise 8.8%, unchanged from June.

China’s economy has largely recovered from disruptions caused by the COVID-19 pandemic, but the expansion is losing steam as businesses face intensifying strains from higher commodity prices and global supply chain bottlenecks.

The global spread of the more-infectious Delta variant of the virus and new outbreaks of cases at home, on top of recent heavy rainfall and floods in some Chinese provinces have also disrupted economic activity.

“The pandemic worsened and caused more disruption in the global supply chain,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

The PPI, a benchmark gauge of a country’s industrial profitability, inched up 0.5% on a monthly basis, accelerating from a 0.3% uptick in June.

Higher crude oil prices and increased demand for thermal coal as China copes with hot weather helped drive up prices, said Dong Lijuan, an official with NBS, in a statement released alongside the data.

Prices in the coal mining and washing and ferrous metal extraction industries jumped 45.7% and 54.6% in July year on-year, respectively.

China’s “zero tolerance” policy to COVID cases will probably put further stress on the supply chain, and inflation pressure may persist in the second half, said Zhang.

China reported 125 new cases of COVID-19 on the mainland for Aug. 8, with most local infections in the central province of Henan and the eastern province of Jiangsu.

Uncertainties caused by the fresh outbreak in China and government response measures led analysts from Goldman Sachs and Barclays to recently revise down their third quarter growth forecasts.

The country’s export growth unexpectedly slowed in July, with firms citing extra pressure from high raw material costs.

China, as the top steel consumer of both coal and iron ore, has stepped up efforts to tame rising commodity prices that have squeezed manufacturers’ margins, including stepping up inspections on trading platforms and releasing state reserves.

Dalian iron ore was on track to end July with a monthly loss of around 10%, the steepest since February 2020.

A separate NBS statement showed that the consumer price index (CPI) in July rose 1.0% from a year earlier, compared with a 1.1% gain in June and below the government target of around 3% this year.

The index was expected to inch up by 0.8%, according to a median forecast in a Reuters poll.

On a month-on-month basis, the CPI rose 0.3%, compared with a 0.2% increase tipped by the Reuters poll and June’s 0.4% decline.

The core consumer price index, which strips out volatile food and energy prices, stood at 1.3% on year, versus a 0.9% rise in June.

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