China’s producer prices increased the most since 2008, squeezed profits

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

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

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

While the gains exceeded expectations of an 8.5% increase, according to a Reuters poll, the rise came from a weak base. The index fell 3.7% in May 2020 during the first months of the coronavirus pandemic.

Rising commodity prices are of particular concern to 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 Cheung Kong. Beijing Graduate School of Business.

“These companies are more pessimistic. They see a very big increase in costs, and they think it will last until the end of the year,” she said on Wednesday, noting that other companies are moving forward. expected prices to normalize earlier. This is based on his team’s follow-up last week on a survey of more than 2,000 Chinese companies in the industrial sector.

The initial survey conducted in late March and April found that business sentiment remained unchanged in the first quarter compared to the previous quarter. However, the study found that the proportion of companies reporting a gross profit margin of less than 15% rose to around 70%.

“They are definitely in a hurry,” Gan said. “A few companies have even said they can’t take orders at this time because the more they produce, the more money they lose. Their bottom line is negative.”

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In recent weeks, China’s central government has announced additional support for small businesses, especially those affected by rising commodity prices.

The impact on small and medium-sized enterprises is “quite large,” Wang Jiangping, deputy minister of the Ministry of Industry and Information Technology, told reporters last week in Mandarin, according to a translation by CNBC.

He noted that their 6% operating profit margin in the first four months of the year was 2 percentage points lower than that of large companies – a widening gap.

Wednesday’s data release showed prices nearly doubled, rising 99.1 percent, for China’s oil and natural gas extraction industry, and 34.3 percent for oil processors, coal and other fuels.

In contrast, the costs for private consumers have increased only slightly. The statistics bureau said on Wednesday that the consumer price index rose 1.3% year-on-year in May, falling short of expectations of a 1.6% increase. The index was pulled down by lower pork prices, after having soared over the past two years.

Trade war worries

Chinese manufacturers are also facing pressure from an expected drop in overseas purchases. An increase in exports, driven by global demand for face masks and other health-related products, helped boost China’s economy last year at the height of the coronavirus pandemic.

Companies are absorbing the costs for now and not downsizing, Gan said. However, she said Chinese manufacturers expect foreign orders decline slightly, although foreign demand ultimately remains roughly the same.

“Usually people don’t know what’s going on overseas,” she said. “One is Covid, the other is (the) trade war and general sentiment against Chinese companies.”

Tensions between China and its largest trading partner, the United States, have intensified over the past three years, with the two countries imposing tariffs on each other’s goods. Chinese exports to the United States increased in May from the previous month, but imports declined.

In addition, a major investment deal between China and Europe, which came close to being concluded at the end of last year, now appears unlikely to be concluded due to sanctions imposed by each side for violations. presumed human rights.

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