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Economy

Chinese wholesale prices edge close to deflation

Lower factory prices tied to weaker corporate profits in repeat of old pattern

Steel pipes in Heibei Province, China. Prices in the domestic steel industry slipped in January.   © Reuters

BEIJING -- China's producer price index rose only 0.1% from a year earlier in January, stoking fears that the world's second-largest economy is once again heading toward deflation at the factory level.

January's PPI, released Friday by the National Bureau of Statistics, moved up at its weakest pace since September 2016. Last month's inflation dropped off by 0.8 percentage point from December's gain.

Out of the 30 sectors represented in the PPI, 10 indicated decline. Chemicals, paper manufacturing, steel, nonferrous metals and automobiles were among the losers. In contrast, only five sectors had gone negative in December.

Prices of basic materials have grown soft. At the end of January, glass prices fell by 9.8% from a year earlier, according to official statistics. The value of polyethylene dropped 7.8%, while coal and reinforcing steel ebbed by 5.8% and 3.9%, respectively. One of the few materials that gained in price was cement, essential for government stimulus infrastructure projects.

In China, the PPI tracks strongly with corporate profits. Industrial profits for November and December last year undershot year-earlier figures, and the timeline overlaps with the point when the increase in producer prices slowed sharply. Monthly industrial profits had fallen short of year-earlier numbers in 2014 and 2015, the same stretch when the PPI had slipped into negative territory.

The PPI entered a sustained upswing in the fall of 2016, but that was due to Chinese authorities scrapping excess production equipment in the steel and coal industries. The state-enforced reduction of supply capacity translated to higher-priced materials, despite weak growth in demand. State-owned coal, steel and chemical enterprises grew rich as a result.

With internal demand now in retreat, due in large part to slumping condominium sales, excess capacity is likely to come under renewed scrutiny this year. On top of that, the trade war with the U.S. complicates a pivot toward greater exports. China is drawing closer to a recurrence of the upstream deflation problem that plagued it during the middle part of this decade.

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