China’s factory-gate prices depreciate for first time in nearly 2 years under zero-Covid policy
- China’s consumer price index (CPI) rose by 2.1 per cent in October from a year earlier, down from a rise of 2.8 per cent in September
- Producer price index (PPI), which reflects the prices that factories charge wholesalers for products, fell by 1.3 per cent in October, down from a rise of 0.9 per cent in September
China’s producer prices fell into deflation for the first time in nearly two years last month, mirroring a sluggish economic environment, with analysts warning of continued downward pressure if Beijing sticks to its zero-Covid policy.
“In China, the economy depends very much on policy, and if policy follows the current track, I don’t think there will be any significant change in the economy, ” said Larry Hu, chief China economist at Macquarie Capital.
The PPI decline highlights weak domestic demand under Beijing’s strict coronavirus policy, Hu added, as well as falling commodity prices amid the overall global slowdown.
“In October, affected by the fall in consumer demand after the [National Day] holiday [at the start of October] and the higher base of comparison in the same period last year, the consumer price increase fell back,” said chief NBS statistician Dong Lijuan.
Beijing might be forced into introducing more policies, otherwise, China will continue to face downward pressure, said Hu.
PPI fell for a 21st consecutive month in October due to falling energy and raw materials prices and a very high base, analysts said.
“Producer price inflation retreated into negative territory for the first time since the end of 2020, and we think it will stay negative through much of 2023,” said Julian Evans-Pritchard and Zichun Huang, China economists at Capital Economics.
China consumer price index (CPI), meanwhile, also missed expectations and rose by 2.1 per cent in October from a year earlier, down from 2.8 per cent growth in September, remaining below the annual target of “around 3 per cent”.
“In October, demand increased in some industries and the national PPI rose slightly from the previous year, but the year-on-year comparison turned down from a higher base from last year,” added Dong from the NBS.
The slowing growth was driven by a further fall in fuel prices, thanks to lower crude oil prices, while the rise in food prices also slowed, analysts said.
Within CPI, food prices in China rose by 7 per cent from a year earlier in October, compared with 8.8 per cent growth in September, while non-food prices grew by 1.1 per cent last month, year on year, down from a reading of 1.5 per cent growth in September.
Pork prices continued to climb, rising by 51.8 per cent in October compared to a year earlier, but the fading impact of the heatwave and drought from earlier in the year meant vegetable and fruit prices dropped back.
Fruit and vegetable price inflation fell to 12.6 per cent year-on-year and minus 8.1 per cent, respectively, in October from 17.8 per cent and 12.1 per cent in September.
‘Further loss of momentum’: China’s factory, services activity slump
“Consumer price inflation eased last month from September’s 29-month high and remained below the government’s preferred ceiling of 3 per cent. It is set to stay low by global standards over the coming quarters,” added Evans-Pritchard and Huang.
“Consumer price inflation could tick up again in the near-term. But any renewed rise will be modest and short-lived. Food prices, the main driver of higher inflation, are likely to peak soon.”
China’s core consumer inflation rate, excluding the volatile prices of food and energy, rose by 0.6 per cent in October compared with a year earlier, unchanged from September.
“Core inflation is likely to remain subdued amid depressed service sector activity under China’s zero-Covid policy, which we think will remain in place through 2023,” said Evans-Pritchard and Huang.
Last week, data had already shown that both China’s factory and services activity contracted in October, pointing to a “further loss of momentum” as coronavirus disruptions worsened and export orders remained under pressure.
“Unlike the rest of the world, China printed low inflation due to weak domestic demand as a result of its zero-Covid strategy, crashing property markets and some other sectoral policies,” said analysts from Japanese investment bank Nomura.
“We expect CPI inflation to drop further to 1.8 per cent year-on-year in November on worsening lockdowns and falling export growth, which could suppress domestic prices. PPI inflation could edge up slightly to minus 1.1 per cent year-on-year in November thanks to a higher base.
“The sharp divergence between PPI inflation in China and other industrial countries means China may be gaining some competitive advantage in manufacturing that could help bolster China’s exports. However, the worsening of global growth is denting external demand.”