China back in business - UOB

Goods leaving Chinese factory gates seem to be on the way higher again.

Key Quotes:

"Yesterday’s release of China’s producer price index showed a strong gain of 6.9% y/y for the month of January, up from an already strong 5.5% y/y rate in December.

This is also the strongest growth rate since August 2011, as robust demand and surging commodity prices are forcing Chinese factories to pass on the higher cost of production over to wholesalers and eventually, consumers.

As a gauge, the Bloomberg Commodity Index (an index of 22 commodities) is up by 22% since a low in January 2016. Iron ore and crude oil prices have also doubled.

Moreover, the weaker RMB means that factories suffer from a loss in real purchasing power when it comes to buying raw materials that are mostly denominated in USD.

Higher producer prices are clearly better for some than others. Upstream companies are benefiting as commodity prices soar.

Downstream companies are suffering as input prices rise, and ability to pass on higher costs to end consumers is limited. For China’s economy as a whole though, the current picture is positive."