China’s strong factory gate inflation shows economic momentum still robust

China’s producer prices were surprisingly strong in October, while consumer inflation picked up pace, suggesting the world’s second-largest economy remains robust despite expected curbs on factory output as the government pursues a punishing war on smog.

The producer price index (PPI) rose 6.9 percent in October from a year earlier, in line with the growth rate in September when it hit a six-month high, data released by the National Bureau of Statistics (NBS) showed on Thursday.

Analysts polled by Reuters had expected PPI inflation rate would slow to 6.6 percent.

China’s consumer inflation, which has stayed well within Beijing’s 2017 target of 3 percent this year, also accelerated more than expected to 1.9 percent from 1.6 percent in September, due to higher food prices and low base effects

“The upshot is that price pressures in China appear strong on the back of still rapid economic growth, a tight labour market, capacity cuts and temporary disruptions to industrial production,” Julian Evans-Pritchard, China Economist at Capital Economics, wrote in a note to clients.

“Price pressures may remain strong for a while longer as the anti-pollution campaign keeps commodity prices elevated and this feeds through into core inflation.”

While China’s economy has surprised financial markets and investors with robust growth, driven by a renaissance in long-ailing “smokestack” industries such as steel this year, property and construction activity, two of the economy’s main growth drivers, are starting to slow due to higher borrowing costs and government measures to cool heated housing prices. And, some analysts flagged a tightening monetary policy outlook given the economy has expanded nearly 6.9 percent growth in the first nine months of the year, and is on track to comfortably meet the government’s 6.5 percent target.

“The rise of inflation momentum seemingly points to further tightening bias in monetary policy,” Zhou Hao, an analyst with Commerzbank, wrote in a note.

ANTI-POLLUTION CAMPAIGN

As northern China enters the heating season in November, the government has stepped up its fight against smog, ordering many steel mills, smelters and factories to curtail or halt production over the winter.

Producer price inflation of raw materials eased only marginally to 9 percent in October compared to 9.1 percent in September, NBS data showed. Industries such as oil and gas mining recorded stronger price gains of 5.1 percent last month. China’s economy is expected to cool to 6.7 percent from a year earlier in the fourth quarter and will likely grow 6.8 percent in 2017, accelerating for the first time in seven years, a Reuters poll showed.
Source: Reuters (Reporting by Cheng Fang, Yawen Chen and Ryan Woo; Editing by Sam Holmes & Shri Navaratnam)

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