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Record inflation in Chinese factories poses another threat to supply chains

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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.

The peak can be attributed to “Higher prices for coal and products from energy-intensive sectors,” Dong Lijuan, senior statistician at China’s National Bureau of Statistics, said in a statement. Coal prices are at record highs in the country as supplies struggle to keep pace with demand from power plants.

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.

Companies that source goods from China are already grappling with port congestion, skyrocketing freight rates and delays. Rising prices and declining production could cause further problems for already strained global supply chains. Citi analysts on Thursday wrote in a note that global inflation could continue to climb as “China’s supply shock spills over into global supply chains.”
Inflation in the United States and Europe is reaching 13-year highs. Germany, which has close trade ties with China, has seen inflation soar to a 29 years peak last month.

The ongoing energy crisis

High inflation is also troublesome 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 increases,” 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.

At least 13 publicly traded companies, including a major soy sauce maker, have increased their prices this year due to rising costs, according to a report from the state-owned company. China Securities Journal, a national financial newspaper affiliated with Xinhua, the country’s official news agency.

An expected slowdown

Thursday’s data came days before China released third-quarter GDP figures, which are expected to show slowing growth.

Several economists revised their growth forecasts for China as the country’s energy crisis worsened. The price of coal, China’s main source of energy reached record highs this week as heavy rains and flooding hit two major mining areas.

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 around 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.

China orders coal mines to increase production as power shortages hit
“The potentially faster-than-expected economic slowdown, driven by energy scarcity and the contagion effect of a possible Evergrande default, will require further easing of monetary policy,” Citi analysts wrote in Wednesday. a research note. They cut their forecast for China’s annual GDP growth to 8.2% from 8.7% due to the Delta epidemic, and a recent wave of regulatory measures on private enterprise.

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