China Economic Update

China's factory gate inflation rose at the highest rate in over a decade last month, official data showed Wednesday, as the world's second-largest economy worked to contain a surge in commodity prices.

Factories so far seem to be absorbing costs rather than passing them on to consumers as domestic demand recovers from the strict coronavirus lockdowns imposed last year.

The producer price index (PPI), which measures the cost of goods at the factory gate, exceeded expectations to spike 9.0 percent on-year in May, said the National Bureau of Statistics.

This marks its highest jump since September 2008.

In particular, prices in the oil and natural gas extraction industry rose 99.1 percent from a year ago, said NBS senior statistician Dong Lijuan.

"PPI is definitely a concern," said UOB economist Ho Woei Chen.

Metal prices started to rise earlier this year with a recovery in construction as well as steel demand for the car industry, she said, adding that recent operation curbs in major steel-producing city Tangshan drove also steel prices higher.

"Probably, producers are absorbing some of these costs but it won't be sustainable for them to keep doing that," said Ho.

For now, PPI inflation has "already triggered Beijing's response including vowing to add supply and cracking down on bitcoin mining," Nomura chief China economist Lu Ting told AFP.

He cautioned that it would be unrealistic to expect a sharp drop in raw material prices in the near future, with "policy inertia" and a need to minimise incidents ahead of the 100th anniversary of the Chinese Communist Party on July 1 meaning an output surge is unlikely.

But consumer prices were "generally stable" last month, Dong said.

The consumer price index (CPI), a key gauge of retail inflation, rose less than expected to 1.3 percent on-year, official data showed.

China's CPI has been driven up in recent years by pork prices after an African swine fever outbreak ravaged stocks, but this has since mostly stabilised with boosted supplies of the staple meat.

Dong said Wednesday that "live pig production continued to recover and the pork supply continued to increase".

Analysts expect a rise in CPI inflation as producer prices pass through, but believe the rise will be gradual.