The producer price index – which measures the cost of goods sold to businesses – rose 10.7% in September from a year ago, according to government data released Thursday. This is the fastest increase since 1996, when the government started releasing such data, according to data from Eikon Refinitiv.
Data from Thursday shows that rising raw material costs are aggressively reducing profits for Chinese companies, an issue that could force them to slow production or even lay off workers. Some factories have reduced work shifts due to electricity rationing.
The ongoing energy crisis
High inflation is also a problem for the Chinese economy.
The country is already in the midst of an energy crisis that is cutting output at factories and leading to blackouts in some areas – a problem fueled by demand earlier this year for construction projects that require fossil fuels and contradict Beijing’s pursuit of ambitious carbon reduction targets.
“The risk of stagflation is increasing,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, wrote in a note Thursday. “The ambitious goal of carbon neutrality puts persistent pressure on the prices of raw materials, which will be passed on to downstream companies.”
Consumer inflation remains low. The consumer price index rose only 0.7% in September compared to the previous year. But there are some signs that producers are starting to pass on the costs.
An expected slowdown
Thursday’s data came days before China released third-quarter GDP figures, which are expected to show slowing growth.
High coal prices have led to widespread electricity shortages, forcing the government to ration electricity in 20 provinces during peak hours and some factories to suspend production. These disruptions led to a sharp drop in industrial production last month.
Manufacturing activity was weak in September, “likely driven by energy constraints at the end of the month,” Goldman Sachs analysts wrote in a research report Thursday. They expect GDP to have grown by about 4.8% in the third quarter from a year earlier, a sharp slowdown from the 7.9% increase in the second quarter.
The Chinese economy is also grappling with another problem: A debt crisis by struggling Chinese conglomerate Evergrande has raised concerns about contagion risks for the giant real estate sector and the economy in general.
Real estate, along with related industries, accounts for up to 30% of the country’s GDP. A slowdown in the sector would have a significant impact on growth and pose risks to financial stability.