In China, the Covid pandemic is shaking producer prices

Beijing: Producer prices in China in October saw their first drop since 2020, according to official data on Wednesday, indicating a drop in demand in the world’s second largest economy due to health restrictions imposed to combat the pandemic.

And China, which was the first country hit by the Covid-19 pandemic, is the last major economy to adopt a rigorous strategy to fight the epidemic, especially due to the low vaccination rate among the elderly.

This health policy includes almost daily examinations of the population and the imposition of mandatory quarantine on people who are confirmed to be infected by the epidemic, or even isolation as soon as injuries occur.

These measures, which involve an economic cost and generate a great state of uncertainty, are considered an obstacle to economic activity and consumption.

China is also experiencing an unprecedented crisis in the real estate sector, which has historically been an important engine of growth.

Against this backdrop, the “BPI” index, which measures the cost of goods as they leave the factory, fell 1.3 percent year-on-year last month, according to the National Statistics Bureau.

This is the first time since December 2020 that this indicator has fallen into negative territory.

In the negative zone

In September, prices rose again 0.9% year-on-year, but at the weakest pace since 2021.

When this indicator is in negative territory, it generally reflects weak demand and low company margins.

“Production prices will remain negative for the next few months and for most of 2023,” cautioned Capital Economics analyst Julian Evans-Pritchard. He attributed this to the fact that global commodity prices are falling.

To illustrate, the cost of coal mining dropped 16.5 percent year-on-year last month, according to the National Bureau of Statistics.

China relies heavily on these fossil fuels to power its power plants.

This contrasts sharply with last fall, when manufacturing costs in China recorded the largest increase in 25 years due to soaring commodity prices.

Rising prices

The consumer price index, the main measure of inflation, rose by 2.1% on an annual basis in October, after 2.8% in the previous month.

This trend is partly attributed to rising food prices, particularly pork prices, which rose 51.8% year-on-year in October.

From month to month the price of this type of meat, the most consumed meat in China, is still increasing by 9.4%, despite the intervention of the authorities on the market to curb prices.

Overall, rising food prices declined last month and “weakness in the economy held back inflation,” according to Evans-Pritchard.

Since the Russian invasion of Ukraine, China has been relatively spared from rising global food prices.

But authorities have closely followed pork prices since the swine fever outbreak wiped out Chinese herds in 2019.