Chinese Fall in Producer Prices Calls for Speculation
Date: 1 August 2016 Share on Twitter Share on Facebook
The Chinese economy is now among the largest and most important in the world by any measure, and it is naturally an essential area of focus for investors of all kinds. Any changes in trends within the Chinese economy are, therefore, monitored very closely and even relatively minor movements can be significant and can present very notable opportunities for speculation. While the Chinese economy has continued to grow at a rate that most other countries around the world would welcome, the pace of that growth has cooled somewhat in recent years.
Nevertheless, the second largest economy in the world remains an enormously significant driver of global growth. Within all that, though, there are movements which could be of interest to investors and the fall in producer prices across the country certainly falls into that category.
A producer price index (PPI) keeps track of the input prices being paid for raw materials, as well as for semi-finished or finished goods within a given economy. In China, the latest PPI figures showed these prices performing more strongly than was generally anticipated. Indeed, the official data on the issue shows Chinese PPI has gone from an annual figure of -3.4 per cent for May to -2.28 per cent for June. This might not seem like too much of a move but it is actually much sharper than the moves typically recorded by this measure on a monthly basis. Plus, the figure was comfortable above the -3.3 per cent which analysts had expected to see. This, potentially, points to an opening for speculation.
Signs of improvement
A key reason why positive moves in China’s PPI could be taken as a positive indicator for the wider economy and for future investments into the country is because it should help to allay what have been widespread fears over deflation within the economy. PPI is an important consideration when it comes to issues around inflation and deflation and the Chinese economy has been grappling with deflationary pressures on a consistent basis over the past couple of years. In December 2014, China’s PPI saw its sharpest dip for two years and by that time it had been declining for each of the previous 34 months. All of which sparked fears that factory gate prices would continue to fall and would leave China with a deflation problem that would potentially hinder growth rates within the economy as whole. Indeed, this has remained a challenge and a drag on the economy ever since, with PPI rating negatively since late 2012 and right through 2015 and 2016. And while the numbers are still negative for China’s PPI as of June 2016, the trend has been one of improvement since almost the beginning of this year and would seem to bode well going forward, particularly as the price increases were notably stronger than analysts had forecast.
PPI is among the most important indicators of the state of a national economy considered by central banks in countries around the world and China is no different in this respect. The prices that producers pay for the materials they need have an impact on consumer prices, which again relates directly to inflation or deflationary pressures within an economy and plays on the minds of central bank decision makers. A key weapon in the armoury of central bankers of course is interest rates and while much of the world has had their base rates set at historic lows not much above zero since 2008, China has been able to maintain a relative high rate given the consistent growth across its economy. But more recent years have seen the People’s Bank of China opting to cut interest rates consistently in light of the deflationary pressures detected within the economy in part by declining and persistently low-level PPI data. In October 2013, the People’s Bank announced that it was to take its base rate of interest down to an unprecedented low of 4.35 per cent. This reduction, otherwise referred to as monetary easing, was the sixth such cut within a year, which reflected the relative difficulties that the Chinese economy was and has been facing. But now with PPI performance having shown a notable and unexpectedly sharp uptick in recent weeks, it could be that a greater degree of confidence is now making its way back into the Chinese economy.
Potential cause for optimism
There is not enough yet to indicate that China’s economy is poised to come roaring back towards the incredible growth rates that were being recorded a decade ago. But any positive indicators will no doubt be keenly tracked by investors across the world who just might be encouraged enough by the upturn in China’s PPI to be persuaded that now is a good time to start speculating on positive growth in the economy going forward.