February factory inflation in China eases, spotlight on global commodities

People walk along Nanjing Pedestrian Road, a main shopping area, in Shanghai, China May 5, 2021. REUTERS/Aly Song

BEIJING, March 9 (Reuters) – Factory inflation in China in February hit its slowest annual pace in eight months, but analysts expect a pick-up in coming months as prices soar global raw materials, including oil, which calls into question the design of policies to support the economy.

The producer price index (PPI) rose 8.8% year on year, the National Bureau of Statistics (NBS) said in a statement on Wednesday, following growth of 9.1% in January, but just above an 8.7% rise in a Reuters poll.

Many Chinese factories closed in the first half of February due to Lunar New Year festivities, which temporarily dampened demand for raw materials. But the war in Ukraine that erupted late last month has since raised concerns about global supply disruptions, pushing commodity prices to decade highs.

On a month-to-month basis, the PPI turned to a gain after a decline in January as international crude oil prices rose sharply and pushed up prices in domestic oil-related industries, according to a separate statement from the SNB. Local prices for non-ferrous metals have also increased.

“We expect year-over-year PPI inflation to remain elevated in the near term as oil and metals prices rose sequentially on geopolitical tensions,” Goldman Sachs analysts wrote. in a note.

On Monday, an official with the state economic planner also said China’s efforts to stabilize commodity prices are facing new challenges in part due to geopolitical disputes. Read more

China sources more than 70% of its oil and 40% of its gas from abroad, even as the government rushes to increase domestic production.

According to the World Bank on Tuesday, the persistent rise in oil prices caused by Russia’s attack on Ukraine could reduce the growth of major oil-importing developing economies, including China, by one percentage point. Read more

China is targeting slower economic growth of around 5.5% in 2022 compared to last year, with the government citing headwinds at home and abroad. Read more

POLITICS

In December, China’s central bank cut the reserve requirement ratio (RRR) for commercial lenders, or the amount of cash banks must hold in reserve, by 50 basis points, freeing up 1.2 trillion yuan ($190 billion). dollars) of long-term liquidity. Read more

Some analysts have said the scope for monetary easing may now be limited due to the threat of rising commodity prices.

“Sanctions on Russia could shut down Sino-Russian trade and lead to higher import prices,” said Bruce Pang, head of macroeconomic and strategic research at China Renaissance Securities.

The central bank said on Tuesday it would pay out more than 1 trillion yuan in profits to the central government this year, in a bid to help support fiscal spending. Read more

Profits come from its foreign reserve operations in recent years, the People’s Bank of China (PBOC) said.

“PBOC profit shifting is in my opinion a better way to relieve the money supply,” said Tian Yuan, former vice director of the Beijing Economic Operations Association.

“This year, the PBOC would focus on asset and liability structure adjustments to maintain relatively loose monetary policy.”

According to ANZ Research, the PBOC profit transfer is equivalent to an increase in liquidity thanks to a reduction in the RRR of more than 50 basis points.

China’s consumer price index (CPI) edged up 0.9% in February, the data showed, unchanged from January’s growth and market expectations.

The Chinese government left its 2022 CPI target, unveiled on Saturday, at around 3%, unchanged from 2021. Last year, the CPI rose just 0.9%, held back by spending prudent consumption.

($1 = 6.3170 Chinese yuan renminbi)

Reporting by Liangping Gao and Ryan Woo; Additional reporting by Beijing Newsroom; Editing by Bernard Orr and Richard Pullin

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