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Record inflation at China's factories threatens supply chains

2021-10-14T13:58:36.857Z

Inflation in China's factories is rising at record rates, stoking fears of stagflation that could affect global supply chains.



Supply chains under pressure What's happening?

3:22

(CNN) -

The cost of goods leaving China's factories is rising at the highest rate ever, stoking fears about possible stagflation in the world's second-largest economy at a time when it is already You are dealing with an extreme energy crisis and deepening debt problems.

The producer price index - which measures the cost of goods sold to companies - soared 10.7% in September from a year ago, according to government data released Thursday.

This is the fastest increase since 1996, when the government began publishing this data, according to Eikon Refinitiv data.

  • China and India, two of the world's largest economies, are facing a growing energy crisis

The rise can be attributed to "rising prices for coal and products in energy-intensive sectors," Dong Lijuan, a senior statistician with the China National Bureau of Statistics, said in a statement.

Coal prices are at all-time highs in the country, as the supply of this fuel has growing problems in satisfying demand from power plants.

Thursday's data shows that rising raw material costs are aggressively slashing profits for Chinese companies, a problem that could force them to slow production or even lay off workers.

An employee works on steel bars at a factory in Hangzhou, east China's Zhejiang province on May 15, 2020.

Some factories have reduced work shifts due to energy rationing.

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Businesses sourcing goods from China are already struggling with port congestion, rising freight rates and delays.

Rising prices and declining production could pose further problems for global supply chains, which are already under enormous pressure.

Citi analysts wrote in a paper Thursday that global inflation could continue to rise as tensions over "supply in China spill over into global supply chains."

Inflation in the United States and Europe is at 13-year highs.

Germany, which maintains close trade ties with China, saw inflation hit a 29-year high last month.

The current energy crisis

High inflation is also a problem for the Chinese economy.

The country is already immersed in an energy crisis that is depressing factory output and causing power outages in some areas, a problem fueled by demand earlier this year for conflicting fossil fuel-intensive construction projects. with Beijing's ambitious targets to reduce carbon emissions.

"The risk of stagflation is increasing," Zhiwei Zhang, chief economist at Pinpoint Asset Management, wrote in a document Thursday.

"The ambitious goal of carbon neutrality puts persistent pressure on raw material prices, which will carry over to companies in the supply chain."

Home prices will rise another 16% by the end of 2022 0:56

Consumer inflation remains low.

The consumer price index only increased 0.7% in September compared to the previous year.

But there are some signs that producers are starting to pass costs on to prices.

At least 13 publicly traded companies, including a major soy sauce maker, have raised their prices this year due to rising costs, according to a report by the state-run China Securities Journal, a national financial newspaper affiliated with Xinhua. the official press agency of the country.

An expected slowdown

Thursday's data comes days before China releases third-quarter GDP figures, which are expected to show a slowdown in growth.

Several economists have revised their growth forecasts for China as the country's energy crisis has worsened.

The price of coal - China's main source of energy - soared this week to record highs due to heavy rains and floods that hit two major mining regions.

High coal prices have caused widespread electricity shortages, forcing the government to ration electricity in 20 provinces during peak hours and to suspend production in some factories.

These disruptions caused a sharp drop in industrial production last month.

Manufacturing activity was weak in September, "likely fueled by energy restrictions 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 compared to the previous year, which is a sharp slowdown compared to the 7.9% increase in the second quarter.

Floods in China affect 1.75 million people 0:40

China's economy is also facing another problem: the debt crisis at embattled Chinese conglomerate Evergrande has sparked concerns about contagion risks to the giant real estate sector and the broader economy.

The real estate sector, along with related industries, represents 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.

"The potentially faster-than-anticipated economic slowdown, driven by power shortages and the contagion effect due to a potential Evergrande default, will require further easing of monetary policy," Citi analysts wrote in a research paper. on Wednesday.

They have cut their forecast for China's annual GDP growth to 8.2% from 8.7% due to the outbreak of the delta variant of the coronavirus and a recent wave of regulatory measures on private companies.

ChinaEconomy

Source: cnnespanol

All news articles on 2021-10-14

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