From China's factories to your shopping cart, price hikes loom

[BEIJING] In China's manufacturing heartland Guangdong, clock maker Dannol Electronics Co is grappling with higher input costs stemming from tougher environmental regulations.

Already squeezed by years of rising wage bills and intensifying domestic competition, the company recently increased asking prices by an average of 15 per cent for new customers and plans to do the same with older buyers soon. A wall clock featuring Manchester United's logo is now priced at US$5.80 for wholesalers, up from US$4.80 a year ago.

"All prices have gone up and inflation is intensifying," said senior sales representative Fan Miaochang.

"As a manufacturer, we can't just bear the cost ourselves."

Bloomberg News first spoke with Dannol representatives at the Canton Trade Fair in October, when a number of small manufacturers and exporters were mulling price increases and years of factory-gate deflation were drawing to a close.

Since then, producer price increases in China have accelerated as commodity prices increase and low base-year effects fall away.

That swing away from deflation is helping restore margins, boosting profits, lowering real borrowing costs and making corporate debts easier to service. For the lucky ones, that is. For others, higher input prices are just adding to the squeeze.

Lin Haobin, founder of decorative desktop pot plant maker Winmart Design, says the price of cardboard boxes he buys for some products have surged to 6.8 yuan (S$1.42) per unit from 3.2 yuan a year earlier.

"This is just one example," Mr Lin said.

"Our cardboard box suppliers said they raised prices because their materials costs increased. They aren't making more money because of the price hikes."

With China the world's biggest exporter and largest consumer of many raw materials, this is how cost pressures spread to the world: rising material prices force up costs for supplier A, which raises prices for manufacturer B which then passes them on to exporter C.

To some investors including Michael Shaoul, chief executive officer at Marketfield Asset Management in New York, that's a bigger deal for the global reflation trade than prospects for more rapid economic growth stemming from Donald Trump's policies.

Yet whether this marks a swing to full-blooded inflationary pressure from China remains contestable. For one thing, negative base-year effects will soon work through, so year-on-year increases should moderate. For another, higher input prices aren't always translating into higher asking prices.

Sandy Chang, owner of bathroom accessories maker Dongguan City XinChen Gift Co, said she's "under great pressure" because marble prices rose 10 per cent after the Lunar New Year holidays, and her workers are pressing for pay raises. While demand has improved a little in the US, one of her major markets, it remains fragile.

"I don't want to raise prices at the moment and scare customers away," she said.

BLOOMBERG