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China Trade, Surging Export Prices Mask Falling Volumes, But Turning Point Looms as Christmas Orders Dry Up

SCMP, November 10, 2021

By Ji Siqi and Su-Lin Tan

 

China trade: surging export prices mask falling volumes, but turning point looms as Christmas orders dry up

China’s exports in October again beat expectations by growing 27.1 per cent from a year earlier But analysts say surging prices have propped up the value of exports and concealed declining export volumes for some products

By Ji Siqi

SCMP, 7:30pm, 10 Nov, 2021

China’s exports grew by 27.1 per cent in October from a year earlier to US$300.2 billion – compared with the 28.1 per cent growth seen in September. Photo: AP

China’s exports have continued to defy expectations and warnings of a slowdown amid coronavirus outbreaks, power shortages and rising shipping costs, but data has shown that while export values have increased, volumes of many goods have not.

Murmurings of slower export growth started in June due to evaporating positive comparison-base effects from previous months and the reopening of alternative overseas manufacturing bases, but after a month of softer shipments in July, growth has since gone from strength to strength.

Data released on Sunday showed China’s exports in October again beat expectations, growing by 27.1 per cent from a year earlier.

But surging prices of exports, such as manufactured products due to strong foreign demand, have driven and propped up the value of exports and concealed declining volumes for some products, analysts said.

From July to September, the contribution of volume to the growth of exports declined to around 16 per cent from 30 per cent in the first half of this yearZhong Zhengsheng

“From July to September, the contribution of volume to the growth of exports declined to around 16 per cent from 30 per cent in the first half of this year,” said Zhong Zhengsheng, chief economist at Ping An Securities.

Export volume of mobile phones in October dropped by 7.31 per cent compared to the same time last year, while the export value rose by 12.11 per cent in US dollar terms, said Donghai Securities’ analyst Li Pei.

Overall, continued strong external demand for Chinese intermediate goods – a product used to produce a final good or finished product – due to increased opening up have kept China’s exports buoyed.

From January to October, exports of mechanical and electrical equipment increased by 22.4 per cent year on year, contributing 58.9 per cent of the total exports.

But a turning point may be around the corner, and potentially weakening external demand may catch up and soften China’s export growth, analysts said, as exports of consumer goods have started to swing due to changing factors globally.

Demand for holiday-related products, such as toys, slowed in October compared with a month earlier, as uncertainties caused by global logistics disruptions have moved this year’s Christmas buying season forward, with buyers anticipating longer shipping times due to congestion at major ports around the world, analysts said.

But the export of clothing, footwear, furniture and home appliances remained strong in October, as the other world’s major manufacturing powerhouse of Southeast Asia has yet to recover from its own Covid-19 outbreaks and strong property sales in the United States also prompted demand for homeware, according to Luo Zhiheng, chief macroeconomy analyst at Yuekai Securities.

Demand from the US, though, is likely to decline in the coming months with the suspension of fiscal subsidies to residents and the upcoming stimulus reduction, he said.

Also, as most other countries have started to adopt a “living with the virus” approach, new outbreaks also increase the export of medical and disease prevention products.

But, an infection rebound would also stymie industrial recovery in other countries, therefore decreasing demand for Chinese intermediate products, Luo added.

Additionally, a falling official headline manufacturing purchasing managers’ index (PMI), a survey measuring sentiment among factory owners in the world’s second-largest economy, indicates contracting factory activity.

In line with the PMI figures, small and medium-sized enterprises have also been struggling with lockdowns, high raw material prices, soaring freight costs and a power crunch that has affected more than half of the country since mid-September.

A large number of export companies are still facing operating pressureLuo Zhiheng

“A large number of export companies are still facing operating pressure,” Luo said. “If most of the companies’ export orders are weak, but orders for a small number of companies have increased significantly, it is possible that exports go up and PMI’s new export orders go down at the same time.”

Luo, though, warned a strong yuan could also derail exports.

“If [the yuan] remains strong, China’s export companies would face greater exchange losses, and their willingness to take new orders would further weaken,” he said.

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Ji Siqi joined the Post in 2020 and covers China economy. She graduated from Columbia Journalism School and the University of Hong Kong.

China trade: surging export prices mask falling volumes, but turning point looms as Christmas orders dry up | South China Morning Post (scmp.com)

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China inflation: consumers set to feel ‘stronger’ knock-on effect of rising factory-gate prices

China’s producer price index (PPI) rose by 13.5 per cent in October from a year earlier, while the consumer price index (CPI) rose by 1.5 per cent last month Higher raw material prices, which have plagued mainly the metals-dependent industries, are now starting to spread to consumer goods

Andrew Mullen

SCMP, 10 Nov, 2021

China’s official consumer price index (CPI) rose by 1.5 per cent in October from a year earlier, up from 0.7 per cent in September. Photo: Bloomberg

There are early signs that upstream producers in China may have started to pass on rising costs to downstream businesses – a shift that was underscored when both the consumer and factory-gate indices beat expectations on Wednesday, although analysts do not expect this to be a long-term trend.

China’s consumer inflation index (CPI) last month rose by 1.5 per cent from a year earlier, up from 0.7 per cent in September, although analysts say the “pass-through” of a higher producer price index (PPI) to consumers is likely to be temporary and a reaction to the recent power crunch.

But they also concede that higher raw material prices, which have plagued mainly the metals-dependent industries, are now starting to spread into consumer goods industries as well.

“The pass-through from PPI to CPI becomes stronger. Looking ahead, PPI inflation may stay elevated for a while, likely through the winter. Energy prices, especially for coal and natural gas, may continue to rise,” said Jing Liu, senior economist for Greater China at HSBC.

“CPI inflation may pick up further from the current level of 1.5 per cent, as more price pressure shifts from PPI to CPI,” Liu added. “Yet, we expect the CPI to stay below the target of 3 per cent. We expect the People’s Bank of China to have more loosening bias for the rest of the year to buffer the economic slowdown.”

Some food companies, however, have announced price hikes of up to 15 per cent for goods such as vinegar, while over the past week in China some isolated cases of panic buying emerged after a government notice advised households to stock up on daily necessities.

The higher rise in CPI in October – the fastest pace since September 2020 – was driven by a 16.6 per month-on-month rise in the price of vegetables caused by “rainfall, crop rotation between summer and autumn, sporadic [coronavirus] outbreaks and rising costs in production and logistic”, according to National Bureau of Statistics statistician Dong Lijuan.

The pass-through has been limited until recently. Firms managed to use their inventories of inputs as a buffer to avoid passing the higher costs to their customers before, but their inventories have been depletedZhiwei Zhang

With China’s PPI rising at the fastest pace in 26 years in October after increasing by 13.5 per cent from 10.7 per cent in September, firms may soon be forced pass on more of their increased costs to customers.

“The risk of stagflation continues to rise. We are concerned about the pass-through from producer prices to consumer prices. The pass-through has been limited until recently. Firms managed to use their inventories of inputs as a buffer to avoid passing the higher costs to their customers before, but their inventories have been depleted,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

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“We have seen more firms hiking their retail prices in recent months. The pass-through will likely become more visible in the coming months and push up the CPI. This may limit the room for monetary policy easing by the People’s Bank of China in 2022.”

Concerns about stagflation, which occurs when an economy is hit by slow growth as well as high inflation and unemployment, had already been ignited by China’s overall economic picture after gross domestic product grew by just 4.9 per cent in the third quarter.

Xu Hongcai, deputy director of the economic policy commission under the China Association of Policy Science, said that the cause of the higher CPI was the price pressure transferred from upstream producers as PPI hit its 26-year high, although the rise of consumer inflation also resulted from higher vegetable prices and a seasonal jump in demand.

“In the short term, the high level of PPI has caused great pressure on the production and operating costs of the manufacturing industry in the middle and downstream, of course, it also affects economic growth and employment, which requires a high degree of attention to,” he said. “But it is too early to say that there is stagflation.”

The PPI increase is expected to turn moderate this month thanks to falling prices in coal and steel, although an immediate turnaround is unlikely, he added.

“[PPI] is likely to maintain the trend of staying at a high level in the first quarter and the first half of next year,” he said.

“[The transmission from PPI to CPI] is also likely to continue to take place for some time to come, but the rebound in CPI will become moderate … a steep increase is unlikely.”

Premier Li Keqiang last week offered help to struggling small and medium-sized enterprises (SMEs) by saying China needs to lower fees and taxes for businesses.

China’s SMEs account for 80 per cent of urban employment in the country, but have been struggling with lockdowns, high raw material prices and soaring freight costs, and some have found production to be no longer economically viable.

October’s PPI increase was largely driven by a 103.7 per cent year on year rise in the coal-mining sector, up from a rise of 74.9 per cent in September.

Rising commodity prices have been blamed for the sharp rise in PPI this year, with China’s energy crisis adding further pressure.

But China’s energy crisis is seemingly easing, and with a number of provinces this week announcing they are scraping power rationing, “factory gate inflation is probably close to a peak”, according to Julian Evans-Pritchard, senior China economist at Capital Economics.

“Producer price inflation continued to surge and reached a new high last month. But this largely reflects temporary disruptions in a handful of industries from energy shortages, which are already easing. There are still few signs of wider price pressures, and we think PPI inflation is likely to drop back in the coming months while CPI inflation looks set to remain muted for the foreseeable future,” he said.

China’s 2021 inflation

Month Consumer price index (CPI) Producer price index (PPI) January -0.3% 0.3% February -0.2% 1.7% March -0.2% 4.4% April 0.4% 6.8% May 1.3% 9% June 1.1% 8.8% July 1% 9% August 0.8% 9.5% September 0.7% 10.7% October 1.5% 13.5%

Source: National Bureau of Statistics

China’s core consumer inflation rate, excluding volatile food and energy prices, rose by 1.3 per cent in October compared with a year earlier, up from a rise of 1.2 per cent in September.

Food prices fell by 2.4 per cent from a year earlier in October, up from a fall of 5.2 per cent in September. The increase was driven by a 15.9 per cent rise in the price of fresh vegetables in October from a year earlier, up from a fall of 2.5 per cent in September.

The price of pork – a staple meat on Chinese plates – fell by 44 per cent compared with a year earlier in October.

Non-food prices rose by 2.4 per cent in October, year on year, up from a reading of 2 per cent in September.

Additional reporting by Orange Wang

Andrew Mullen

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Andrew Mullen returned to the Post in 2018 as a Production Editor for the China Economy desk having earlier worked as a reporter on the Sport desk. He has previously worked for the Press Association, the BBC and sport marketing company Lagardere Sports in both Hong Kong and the United Kingdom.

China inflation: consumers set to feel ‘stronger’ knock-on effect of rising factory-gate prices | South China Morning Post (scmp.com)

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