Monday, September 12, 2005

China's Producer Prices Climb On Rise in Raw-Materials Costs

September 12, 2005

BEIJING -- China's producer-price index unexpectedly rose 5.3% in August from a year earlier, the government said. The pace accelerated from the 5.2% rise recorded in July.

The index is regarded as a leading indicator of inflation, because it reflects price increases that may eventually be passed on by companies to consumers. Economists had expected a 5% rise for August.

For the first eight months of the year, the index rose 5.5% from the same period a year earlier, the National Bureau of Statistics said in a statement.

Prices of raw materials and fuel rose 8.1% in August from a year earlier, while prices for copper, aluminum, lead, zinc and nickel increased between 7.5% and 18.1%. Steel-product prices rose between 2.8% and 3.3%.

The bureau didn't elaborate on the factors behind the price increases.

China's producer-price inflation has generally fallen since a peak in the fourth quarter of 2004. Some economists expect this trend to persist as July's yuan revaluation cuts the cost of imported raw materials, though others worry about the rising price of oil.

"Oil prices have gone up, but that has partially been offset by the deceleration in prices of steel, for instance, and even coal prices are starting to fall from recent peaks," said Qu Hongbin, economist with HSBC in Hong Kong. "It seems that consumer prices really haven't picked up that much."

"China has had this massive capacity expansion over the last two to three years, which means that the competition -- particularly in the downstream industries -- is so intense that it's very difficult for them to pass on prices to consumers," the economist said. "I think also the expansion in capacity as well as productivity improvement have made industry more capable of absorbing margin squeezes by high oil prices."

The government was to release the August consumer-price index today. The year-to-year increase is expected to extend the recent trend of less than 2%, as increased capacity keeps upstream price pressures from trickling down.

Year-to-year CPI growth has eased after peaking at 5.3% in August 2004. The index rose 1.6% in June and 1.8% in May.

Analysts said intense competition among makers of products from cars to televisions has helped hold down consumer prices despite the pipeline pressures, but that has squeezed corporate margins. Many economists reckon consumer-price inflation will begin ticking up toward the end of the year.

"The CPI will probably continue to edge up very gradually, as PPI continues to run higher than the CPI numbers, so we will gradually see a bit more pass-through," said Yiping Huang, chief Asia economist at Citigroup in Hong Kong.

"There is an issue of excess capacity in some manufacturing industries. When input starts to rise, sometimes it squeezes more on the margin than pushing up the finished-goods price, so it's a limited pass-through. We are seeing CPI picking up gradually," he said.


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