China's April producer inflation slows more than expected

[BEIJING] China's April producer price inflation cooled more than expected as iron ore and coal prices tumbled further, pressured by fears that domestic demand will not be strong enough to absorb surging supplies of steel.

A renaissance in China's steel industry has been a major driver of the world's second-largest economy in recent quarters, helping generate the strongest profit growth in years and adding to a reflationary pulse across the global manufacturing sector.

The soft data, combined with slightly slower growth in manufacturing activity, reinforces analysts' views that China's economic expansion remains solid but is starting to moderate after a surprisingly strong start to the year.

First-quarter economic growth came in at a faster-than-expected 6.9 per cent, which could give the economy enough of a tailwind to hit Beijing's full-year target even if growth starts to fade in coming quarters as many analysts expect.

The producer price index (PPI) rose 6.4 per cent from a year earlier, slower than economists' expectations for a 6.9 per cent rise and easing further from the previous month's gain of 7.6 per cent.

Analysts said the rally in producer prices may have peaked as a torrid rally in China's commodities markets showed signs of correcting. Iron ore and steel hit multi-month lows on China's future markets in April amid concern over rising inventories.

Capital Economics said in a report that producer prices were set to fall again in May given that the rout in industrial commodity prices had deepened. "Further ahead, producer price inflation should continue to wane as policy tightening weighs on economic activity...hopes for a sustained reflation in China are fading." On a month-on-month basis, producer prices fell 0.4 per cent in April, the first drop since June, led by declines in iron and steel smelting and processing.

In March, China's PPI cooled for the first time in seven months as commodities prices tumbled, pressured by fears that Chinese steel production is outweighing demand and threatening a glut of the metal later this year.

Factory gate prices had only turned positive on a year-on-year basis last September, after falling for nearly five years, leaving many industrial firms saddled with idle capacity and less cash flow to service their debts.

The consumer price index (CPI) in April rose 1.2 per cent from a year earlier, edging up from March's 0.9 per cent and slightly above analysts' forecasts, the National Bureau of Statistics said on Wednesday.

Food prices, the biggest component of the consumer price index (CPI), fell 3.5 per cent.

Core inflation inched up to 2.1 per cent, with costs for health care rising 5.7 per cent.

Analysts polled by Reuters had predicted April consumer price inflation would edge up to 1.1 per cent but remain well within the central bank's comfort zone, giving it room to continue with a gradual pace of monetary policy tightening without hurting economic growth.

China's annual inflation is to average 2.1 per cent in 2017 and 2.3 per cent in 2018, according to a Reuters poll of over 75 economists.

Beijing is targeting consumer inflation of 3 per cent this year, unchanged from 2016.

Chinese President Xi Jinping called last month for increased efforts to ward off systemic risks to help maintain financial security, the official Xinhua news agency reported.

REUTERS