China’s Electricity Price Hike Adds to Mounting Inflation Risks
The State Council, China’s cabinet, said Oct. 8 power prices will be allowed to rise by as much as 20% against a benchmark, double the level of the current cap, a move that would make it profitable for electricity producers to boost supply, while also curbing users’ demand.
Nomura Holdings Inc.’s chief China economist, Lu Ting, estimates the impact on consumer price index could be about 0.4 percentage point, while Michelle Lam, greater China economist at Societe Generale SA, projects a 0.1 percentage point increase in CPI.
The effect on the producer price index could be bigger, given higher costs for energy-intensive industries. Analysts led by Sun Binbin at Tianfeng Securities Co. Ltd. said in a report Sunday the power hikes could result in a 1% rise in PPI and 0.5% increase in CPI.
“The pressure for manufacturers to pass on price increases to the downstream is increasing,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. Factory inflation is likely to remain elevated in the coming months, with the full-year increase in PPI likely to reach over 9%, he said.
The worsening inflation outlook comes alongside a deterioration in economic growth this year given sluggish consumer demand, tighter property curbs and worsening energy shortages.
Factory inflation, which has picked up sharply this year because of soaring commodity prices, likely surged 10.5% in September, according to a Bloomberg survey of economists ahead of official data on Thursday. That would be the steepest monthly increase since 1995.
Consumer inflation has been benign so far, in part thanks to falling pork prices and greater competition among downstream businesses.
The initial impact of the electricity hikes on consumer inflation will be much smaller than 0.4 percentage point, but price pressures will pass through from industrial and commercial users as time goes on, according to Nomura’s Lu.
The price hike could raise power prices for non-agricultural businesses by about 10%, which in turn could add 0.4 percentage points to China’s gross domestic product deflator, or the ratio of nominal GDP over real GDP, he said.
Citigroup Inc. analysts led by Tracy Liao warned of a “short period of stagflation” in China because of elevated PPI inflation and growth pressures. “China may also export inflation as the disruptions ripple through global supply chains,” the analysts wrote in an Oct. 8 note.
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