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China’s factories hit a headwind of rising costs and weak demand


Runaway commodity prices in both onshore and offshore markets have raised regulatory concerns

China’s runaway industrial machine was pulled back in April as global supply chain bottlenecks and rising raw materials costs weighed on production.

While its exporters are still enjoying strong demand, China’s factories slowed their output growth in April and retail sales fell short of expectations, cooling the blistering economic recovery from last year’s Covid-19 slump.

Factory output grew 9.8% in April from a year ago, in line with forecasts but slower than the 14.1% surge in March, National Bureau of Statistics data showed on Monday. Retail sales, meanwhile, rose 17.7%, much weaker than a forecast 24.9% rise and the 34.2% surge in March.

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NBS spokesman Fu Linghui said while China’s economy showed a steady improvement in April, new problems are also emerging, notably the rise in international commodity prices.

“The foundations for the domestic economic recovery are not yet secure,” Fu told a news briefing in Beijing on Monday.

“For companies as a whole, price increases are conducive to the improvement of corporate efficiency but the pressure on downstream industries needs to be paid attention to,” he added.

China’s factory price inflation hit its highest pace since October 2017 in April. That could rise further in the second and third quarters, according to a report from the central bank last week.

FADING BASE

The slower growth rates in the April activity indicators were also due in part to the fading base effects as year-on-year comparisons rolled away from very sharp declines seen when coronavirus shut down much of the country in early 2020.

In the factory sector, motor vehicle production growth fell sharply to 6.8% from 69.8%, due in part to the base effect as well as critical shortages of semiconductors used in car systems.

Growth in the production of cement slowed in April, and coal production fell on year, although aluminium and crude steel output hit record highs, helped by firm demand.

“China’s economy shows signs of unbalanced recovery: strong exports and domestic investment on one hand, but weak consumption on the other,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note. 

COVID UNCERTAINTY

Sectors related to travel, leisure and entertainment are large employers and still held back by Covid uncertainty, he said.

Home appliances sales growth dropped particularly sharply in April from the month before, falling from 38.9% growth on year in March to 6.1%, NBS data showed.

Julian Evans-Pritchard, senior China economist at Capital Economics, in a note said month-on-month retail sales growth fell well below its pre-pandemic pace.

“Looking ahead, we think the rebound in consumption should gather pace again in the coming months as the labour market continues to tighten,” he said.

China’s economy expanded by a record 18.3% in the first quarter and many economists expect growth will exceed 8% this year.

  • Reporting by Reuters

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Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.