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A vegetable market in Nanning, China. Consumer prices rose 2.5% over the previous year in September, mainly due to higher food prices.
Photo:
Hu Yan / Zuma Press
Ordinary Chinese people are paying more for food and housing, but indebted industrial firms are starting to lower their prices. For the Chinese central bank, strive to keep the Chinese economy on a tight course by avoiding grumpy consumers and the failures of big business, this could become a serious problem.
Chinese citizens face a new surge in inflation: consumer prices rose by 2.5% compared to September 2011, the highest rate recorded since 2014, excluding the holiday period around Lunar New Year. The main culprit is rising food prices due to bad weather and an outbreak of African swine fever.
The trend would be less worrying if Chinese manufacturers still benefited from strong price increases driven by sustained demand – but separate data suggest they are not. Overall producer prices rose 3.6% over the year, slower than August's 4.1% increase. The increase last month is largely due to higher oil prices. The situation in some key sectors is more worrying. In the steel sector, prices rose at the slowest pace since mid-2016, when Chinese heavy industry was just emerging from years of deflation. Non-ferrous metal producer prices actually declined during the year, the first decline since July 2016.
The worrisome price hikes for heavy industry are worrying because it is there – and in infrastructure and real estate – where the debt of China is the heaviest. Slow or negative selling price gains are preventing companies from repaying their debts: actual bank loan-to-production rates were probably around 2% in the third quarter, double the rate recorded at the end of the year. the end of 2017. the levels of about 10% that prevailed at the end of 2015. However, if the production price inflation continues to decline, pressure on the Chinese central bank to further ease the monetary policy and raise the price of materials will also increase.
This would be much more dangerous, however, since consumer prices are high and the yuan is already flirting with the key psychological threshold of seven to one dollar. Core inflation of Chinese consumers – excluding food and energy – is falling. If the price of oil declines and China's food supply stabilizes rapidly, it is likely that headline inflation will also stabilize.
Nevertheless, the acceleration of consumer inflation and the slowdown in producer prices in China are to be watched. This last factor generally means weaker growth and more flexibility. The first makes relaxation more risky, especially with the yuan already in dangerous territory. If this divergence persists, China's well-lit trajectory to a soft landing could begin to darken rapidly.
Write to Nathaniel Taplin at [email protected]
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