BEIJING, April 10 (Reuters) – China’s factory-gate prices rose for the first time in more than three years in March, in an early sign that the war in Iran is feeding cost pressures into the world’s second-largest economy.
Economists warn that a shift to inflation driven by higher costs rather than stronger demand could leave Beijing boxed in, squeezing corporate margins, crimping growth and narrowing room for stimulus.
The producer price index (PPI) increased 0.5% from a year earlier, data from the National Bureau of Statistics showed on Friday, ending a 41-month streak of declines driven partly by intense price-cutting by businesses in a phenomenon widely dubbed as “involution”. The reading slightly outpaced an estimated 0.4% gain in a Reuters poll.
Producer prices surged in energy‑intensive industries, with the non-ferrous metal mining sector recording a 36.4% jump last month and non-ferrous metal smelting and processing posting a 22.4% rise.
China’s yuan held steady against the dollar after the inflation data, but looked set for the biggest weekly rise in nearly 15 months. Mainland equity market advanced, with the Shanghai stock benchmark touched a three-week high to cross the psychologically important 4,000 mark.
“Imported inflation is not friendly to the economy,” said Xing Zhaopeng, senior China strategist at ANZ.
“To eradicate the risk of deflation, China still needs to continue to promote ‘anti-involution’ efforts and stimulate domestic demand.”
Since late February, China has allowed domestic fuel prices to rise but has capped increases to help cushion the blow of surging international oil prices.
“It is not clear how much of it was driven by weaker supply due to the conflict in the Middle East versus stronger demand driven by the anti-involution campaign,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“The situation in the Middle East remains highly uncertain. So is the inflation outlook for many countries including China.”
Consumer prices rose at a slightly slower pace. The consumer price index (CPI) ticked up 1% year-on-year, compared with a 1.3% rise in February. Economists polled by Reuters had expected prices to climb 1.2%.
On a monthly basis, CPI fell 0.7%, compared with forecasts for a 0.2% decline and following a 1% rise in February.
The emergence of largely imported price pressures comes at a delicate time for an economy that remains fragile at home and increasingly exposed to weakening external demand.
“Among the Asia economies which have reported March inflation data so far, it is the only one that experienced a month-on-month CPI decline,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.
“In a cost-push inflation cycle, firms normally can’t fully pass on price hikes to end consumers. As they absorb part of the cost increases, it hits their profits.”
Domestic car sales fell for a sixth straight month in March, as rising fuel prices damped demand for petrol-powered models while electric vehicle sales continued to feel the impact of reduced incentives.
“Our framework suggests onshore prices would need to rise much more materially before generating the kind of inflation signal that would warrant a meaningful shift in policy bias,” said Marco Sun, chief financial market analyst at MUFG (China).
China needs to juggle rising inflation with growth risks, a central bank adviser said in late March.
Core CPI, excluding food and fuel, grew 1.1% year-on-year, versus a 1.8% rise in February.
(Reporting by Qiaoyi Li, Ryan Woo and Shuyan Wang; additional reporting by Winni Zhou in Shanghai and Claire Fu in Singapore; Editing by Kevin Buckland)
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