• Fri. Oct 22nd, 2021

Record inflation in China’s factories poses another threat to global supply chains

Byeditorial

Oct 14, 2021

(CNN) – The cost of goods leaving the China factories is increasing at the highest rate ever recorded, stoking fears about a possible stagflation in the world’s second largest economy at a time when it is already grappling with a extreme energy crisis and deepening their debt problems.

The producer price index – which measures the cost of goods sold to companies – soared 10.7% in September from a year ago, according to government data released Thursday. This is the fastest increase since 1996, when the government began publishing this data, according to Eikon Refinitiv data.

The rise can be attributed to “rising prices for coal and products in energy-intensive sectors,” Dong Lijuan, a senior statistician with the China National Bureau of Statistics, said in a statement. Coal prices are at all-time highs in the country, as the supply of this fuel has growing problems in satisfying the demand of power plants.

Thursday’s data shows rising raw material costs are aggressively slashing profits for Chinese companies, a problem that could force them to slow production or even lay off workers.

An employee works on steel bars at a factory in Hangzhou, east China’s Zhejiang province on May 15, 2020.

Some factories have reduced work shifts due to energy rationing.

Companies sourcing goods from China are already struggling with port congestion, rising freight rates and delays. Rising prices and declining production could pose further problems for global supply chains, which are already under stress. enormous pressure. Citi analysts wrote in a paper Thursday that global inflation could continue to rise as tensions over “supply in China spill over into global supply chains.”

Inflation in the United States and Europe is at 13-year highs. Germany, which maintains close trade ties with China, saw inflation peak 29 years old last month.

The current energy crisis

High inflation is also a problem for the Chinese economy.

The country is already immersed in an energy crisis that is sapping factory output and causing power outages in some areas, a problem fueled by demand earlier this year for conflicting fossil fuel-burning construction projects. with Beijing’s ambitious targets to reduce carbon emissions.

“The risk of stagflation is increasing,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, wrote in a document Thursday. “The ambitious goal of carbon neutrality puts persistent pressure on commodity prices, which will carry over to companies in the supply chain.”

Home prices will rise another 16% by the end of 2022 0:56

Consumer inflation remains low. The consumer price index only increased 0.7% in September compared to the previous year. But there are some signs that producers are starting to pass costs on to prices.

At least 13 publicly traded companies, including a major soy sauce maker, have raised their prices this year due to rising costs, according to a report in the state newspaper. China Securities Journal, a national financial newspaper affiliated with Xinhua, the country’s official news agency.

An expected slowdown

Thursday’s data comes days before China releases third-quarter GDP figures, which are expected to show a slowdown in growth.

Several economists have revised their growth forecasts for China as the country’s energy crisis has worsened. The price of coal – China’s main source of energy – soared this week to record highs due to heavy rains and floods that hit two major mining regions.

High coal prices have caused widespread electricity shortages, forcing the government to ration electricity in 20 provinces during peak hours and to suspend production in some factories. These disruptions caused a sharp drop in industrial production last month.

Manufacturing activity was weak in September, “probably driven by energy restrictions at the end of the month,” Goldman Sachs analysts wrote in a research report Thursday. They expect GDP to have grown by around 4.8% in the third quarter compared to the previous year, which is a sharp slowdown compared to the 7.9% increase in the second quarter.

Floods in China affect 1.75 million people 0:40

China’s economy is also facing another problem: the debt crisis at embattled Chinese conglomerate Evergrande has sparked concerns about contagion risks to the giant housing sector and the broader economy.

The real estate sector, along with related industries, represents up to 30% of the country’s GDP. A slowdown in the sector would have a significant impact on growth and pose risks to financial stability.

“The potentially faster-than-anticipated economic slowdown, driven by power shortages and the contagion effect due to a potential Evergrande default, will require further easing of monetary policy,” Citi analysts wrote in a research paper. on Wednesday. They have cut their forecast for China’s annual GDP growth to 8.2% from 8.7% due to the outbreak of the delta variant coronavirus and a recent one wave of regulatory measures on private companies.