China’s producer costs surge essentially the most since 2008, lower into income

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Workers inspect rolls of aluminum sheet in a factory in Wuhan, China.

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BEIJING – China’s producer price index rose 9% year over year in May as commodity prices rose, the National Bureau of Statistics said on Wednesday.

This was the fastest increase in production costs since September 2008, when the index rose 9.13%, according to Wind Information.

While earnings exceeded expectations of an 8.5% increase, according to a Reuters poll, the increase comes from a low base. The index fell 3.7% in the first few months of the coronavirus pandemic in May 2020.

Rising raw material prices are a particular problem for companies in the building materials industry as well as iron and steel, said Gan Jie, professor of finance and academic director of MBA programs at Beijing’s Cheung Kong Graduate School of Business.

“These companies are more pessimistic. They see a very sharp spike in costs and think it will be until the end of the year, ”she said on Wednesday, noting that other companies’ expected prices would normalize sooner. That comes from her team’s follow-up last week in a survey of more than 2,000 Chinese companies in the industrial sector.

The first survey at the end of March and April showed that business sentiment remained unchanged in the first quarter compared to the previous quarter. However, the study found that the proportion of companies with gross profit margins below 15% has risen to around 70%.

“You will certainly be bruised,” said Gan. “Some companies even said they can’t take orders right now because the more they produce, the more money they lose. Their net profit is in negative territory.”

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In the past few weeks, the Chinese central government has announced additional support for small businesses, especially those affected by rising commodity prices.

The impact on medium-sized and small businesses is “pretty big,” said Wang Jiangping, vice minister for the Ministry of Industry and Information Technology, told reporters last week, according to a CNBC translation in Mandarin.

He found that their operating profit margin for the first four months of the year was 6%, 2 percentage points lower than that of large corporations – a gap that is widening.

Wednesday’s data release showed that prices for China’s oil and gas exploration industries nearly doubled by 99.1% and prices for oil, coal and other fuel processors rose 34.3%.

In contrast, private consumption costs rose only slightly. The statistics office announced on Wednesday that the consumer price index had risen by 1.3% in May compared to the previous year and thus missed the expectations of an increase of 1.6%. The index was dragged down by a fall in pig prices after rising over the past two years.

Concerns about the trade war

China’s manufacturers are also feeling pressured by an expected decline in overseas purchases. A surge in exports, driven by global demand for face masks and other health products, helped boost China’s economy last year during the height of the coronavirus pandemic.

For the time being, the companies will bear the costs and not cut the workforce, Gan said. However, Chinese manufacturers assume that foreign orders will decline slightly, even if foreign demand ultimately remains roughly the same.

“In general, people are unsure of what is happening overseas,” she said. “One is Covid, the other is (the) trade war and the general mood against Chinese companies.”

Tensions between China and its largest trading partner, the US, have escalated over the past three years as both countries imposed tariffs on each other’s goods. Chinese exports to the US rose in May compared to the previous month, but imports fell.

In addition, it seems unlikely that a major investment deal between China and Europe, concluded late last year, will be finalized due to sanctions imposed by both sides for alleged human rights abuses.

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