Experts: Demand boost possible despite price rise

The elevated prices of industrial goods in China are unlikely to have a major effect like driving up consumer prices as the country's overall inflationary pressure is largely controllable, offering some policy leeway for the government to further boost domestic demand, economists said on Tuesday.

Limited transmission from producer prices to consumer prices would mean some smaller companies will have to endure a difficult time as their profits may be squeezed; so, more supportive policies are needed to ensure their survival, they said.

The National Bureau of Statistics' July inflation data, which were released on Monday, showed the country's consumer price inflation remains moderate while producer prices rose faster than expected.

China's consumer price index grew by 1 percent year-on-year last month, down from 1.1 percent in June, according to the NBS.

The country's producer price index, which gauges factory-gate prices, rose by 9 percent year-on-year, up from 8.8 percent in June and the same as May's 9 percent, the highest level in the year.

The slower growth of the CPI in July was mainly due to the decline of food prices while the rapid rise of the PPI was a result of the rebound in raw material prices, economists said.

Wen Bin, chief researcher at China Minsheng Bank, said the widened gap between the rises in consumer prices and producer prices means that there has not been a notable price transmission effect from industries to consumers and China's inflation pressure will remain moderate for the remainder of the year.

"We expect PPI inflation to moderate to 8.6 percent year-on-year in August on stabilization of raw material prices, and to stay above 8 percent in the subsequent months before falling to around 7 percent toward the year-end," said Lu Ting, chief China economist at Nomura Securities, in a research note.

While PPI inflation's effect on nonfood CPI inflation could become more visible in the coming quarters, domestic inflationary pressure is largely controllable and it is unlikely that policymakers in Beijing will overreact to the stronger-than-expected July inflation data, Lu said.

While the rapid rise of prices of industrial goods is unlikely to trigger an overall inflation in China, it will put some smaller companies into a more difficult position as they have limited bargaining power and will see their profits squeezed, said Guan Qingyou, chief economist at the Rushi Financial Research Institute.

"Small and medium-sized enterprises will face greater pressure and they are in urgent need of policy support," he said.

Zhao Shenglan, legal representative of Xunxian Shengshi Plastic &Pack Belt Products Factory, a private manufacturer based in Hebi, Henan province, said the company has operated at a low profit margin as rising raw material prices have inflated costs while product prices could not go up.

Analysts said the moderate inflation pressure will give policymakers more policy leeway to use easing measures to stabilize growth as the Chinese economy could face greater headwinds in the coming quarters. Many of them see an increasing need to cut interest rates to effectively boost domestic demand and reduce corporate financing costs.

While the Chinese central bank has emphasized that it has not changed its prudent monetary stance, economists expect that more accommodative measures could be rolled out to mitigate growth pressure in the second half of the year and to ease liquidity pressure in the financial system.