China's factory gate price growth slows, but inflationary pressures persist

China's factory gate prices rose at a slightly slower pace in June, providing some reprieve for businesses though persistently high raw material costs are threatening to undermine economic recovery

BEIJING (Reuters) - China's factory gate prices rose at a slightly slower pace in June, providing some reprieve for businesses though persistently high raw material costs are threatening to undermine the post-coronavirus economic recovery.

The producer price index (PPI) increased 8.8% from a yearearlier, compared with a 9.0% rise in May, the National Bureau of Statistics (NBS) said in a statement, as prices for copper and steel fell following a government crackdown on metals prices.

Analysts in a Reuters poll had expected the PPI to rise 8.8%.

The PPI, a benchmark gauge of a country's industrial profitability, inched up 0.3% on a monthly basis, easing from a 1.6% uptick in May.

Persistently high inflationary pressures in the industrial sector are weighing on the post-COVID recovery of the world's second-biggest economy, with Chinese leaders increasingly concerned of the negative impact on many small firms who are not able to pass on the higher costs to consumers.

Price gains slowed in the oil and natural gas extraction and ferrous and non-ferrous metal smelting and processing sectors, said Dong Lijuan, a senior statistician at the NBS in a statement accompanying the data release.

"The domestic policy of ensuring supply and stabilising prices in the commodity sector is showing initial effect, driving an improvement in the market supply and demand, and a slowdown in price gains of industrial products," said Dong.

To help firms cope with rising commodity prices, the country's cabinet on Wednesday raised the prospect of timely cuts to the amount of cash banks must hold as reserve, which would be the first such move since April last year when the economy was badly jolted by the COVID-19 pandemic.

Prices for commodities such as coal, steel, iron ore and copper have risen sharply in recent months, driven by easing pandemic lockdowns in many countries and ample global liquidity.

China, the world's biggest consumer of both coal and iron ore, has stepped up efforts to rein in runaway metals prices, including selling supplies from state reserves, triggering a drop in steel and copper prices.

Prices for the most-traded copper contract on the Shanghai Futures Exchange fell 7.7% in June.

Some analysts believe the moves will have only a limited impact due to an ongoing imbalance between tight supplies and rising demand by more countries recovering from the pandemic.

NBS data also showed China's consumer price index (CPI) rose1.1% in June in annual terms, slower than a 1.3% gain tipped by the Reuters poll, pointing to limited pass-through to consumers from the high industrial prices.

Pork prices, a key component of China's CPI, have been on the decline in recent months, driving a drop of 1.7% in food prices. Concerned about tumbling pork prices, authorities late last month also announced plans to buy pork for state reserves.

China's annual average consumer inflation is likely to be below 2% this year, the central bank governor Yi Gang said last month, well below the government target of around 3%.

Core inflation, which strips of volatile food and energy prices, stood at 0.9% in June, unchanged from May.

 

(Reporting by Liangping Gao, Stella Qiu and Ryan Woo; Editing by Shri Navaratnam)