China factory prices drop for 1st time in 2 years amid COVID-19 curbs

► Date : Nov 07, 2022


China's factory gate prices fell in October for the first time since December 2020, and consumer inflation moderated, highlighting weak domestic demand as strict COVID curbs, a property slump, and global recession risks weighed on the economy.

According to analysts, the struggles of businesses and consumers both at home and abroad will pile deflationary pressure on China in the coming months, with aggressive global interest rate increases and the Ukraine war compounding Beijing's challenge.

The producer price index (PPI) fell 1.3% year on year, reversing a 0.9% gain a month earlier, according to National Bureau of Statistics (NBS) data released on Wednesday, and compared to a 1.5% contraction predicted in a Reuters poll.


Consumer inflation also fell from a 29-month high in September, while underlying price pressures remained much lower, with core inflation rising 0.6% in October, unchanged from September.


"Adverse factors such as weak domestic demand and softening exports will make China wary of a deflationary slide, as indicated by its moderate core-CPI reading of less than 1.5% growth for more than two years," said Bruce Pang, chief economist and head of research at Jones Lang Lasalle Inc.


According to an accompanying NBS statement, the deflationary impulse in the producer price gauge reflected the sharply higher year-ago levels as well as falling commodity prices.


Prices in the coal mining and washing industry fell 16.5%, following a 2.7% drop the previous month, while those in ferrous metal smelting and rolling processing fell 21.1%, following an 18.0% drop in September.


The world's second-largest economy has been hampered this year by a recurrence of COVID-19 outbreaks, forcing authorities to impose stringent anti-virus controls, putting a damper on factory and consumer activity.


China's trade engine has also suffered, with exports and imports falling in October, and economists predict further weakness in the coming quarters due to domestic pressures and global recession risks.


"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," Nomura analysts said in a note to clients.


"However, the worsening of global growth is denting external demand."



The consumer price index increased 2.1% year on year, easing from a 29-month high of 2.8% in September, which was primarily driven by falling food prices. It was also slower than the 2.4% predicted by economists.


Food prices increased 7.0% year on year, slowing from an 8.8% increase the previous month, with fresh vegetable prices falling 8.1% from a 12.1% increase in September.


Pork prices, a key driver of the CPI, rose 51.8% year on year in October, outpacing the 36% increase in September.


China has pledged to continue with its strict COVID-19 containment strategy nearly three years into the pandemic. Analysts predict that policymakers will be cautious in easing monetary policy due to concerns about capital flight in the midst of sweeping global interest rate hikes led by the Federal Reserve.


China's yuan currency has already been battered this year by the global tightening trend and a strong US dollar, effectively limiting the People's Bank of China's headroom for any significant policy action.


According to Julian Evans-Pritchard, senior China economist at Capital Economics, "the upshot is that inflation is unlikely to become a major policy constraint in China."


"That said, there are currently other barriers to monetary easing, such as the PBOC's efforts to slow the renminbi’s depreciation against the U.S. dollar."


The International Monetary Fund last month said it expects China's growth to slow to 3.2% this year, a 1.2-point downgrade from its April projection, on expectations of a gradual lift of strict COVID-19 curbs next year but no quick resolution to the real estate crisis


► Tags : #china #covidcurbs #economy

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