The factory to the world has a new export: inflation. And it's shipping faster than many thought possible just a few months ago.
China's weakening yuan, stimulus designed to ensure robust growth ahead of a crucial Communist Party Congress next year, and rebounding commodity prices are pushing up factory prices. Having turned positive in September for the first time in more than four years, producer prices rose 1.2 per cent in October from a year earlier. That will almost double to 2.3 per cent in November, according to analysts surveyed ahead of data due Friday.
The pace is seen quickening even more next year: JPMorgan Chase & Co. estimates factory inflation will rise to as high as 4 per cent in the first quarter while Commonwealth Bank of Australia sees it peaking at 6 per cent in the third quarter of 2017.
Such increases would ripple through China's vast supply chain across Asia, and to consumer markets from New York to New Zealand. The price turnaround coincides with a recent spike in oil prices and rising expectations for global reflation as U.S. President-elect Donald Trump prepares to boost fiscal and infrastructure spending.
"China may quickly fuel upward global price movements once the country's manufacturers begin passing on their own rising costs, which should happen quite quickly in 2017," said Andrew Polk, Beijing-based head of China research at Medley Global Advisors, which advises hedge funds and other institutional investors.
Squeezed between surging wages, rising input costs and tepid demand, China's exporters aim to pass more of the pain to buyers next year, according to makers of everything from clocks to hot tubs interviewed at the Canton Fair in October.
The reflation road ahead though isn't without potential potholes. Exports remain in a funk for now despite support from yuan depreciation against the dollar, the currency in which most shipments are priced. Drags on rising factory prices include excess capacity in industries from steel to cement.
Policy makers also are intensifying measures to rein in excessive home prices and selectively tightening liquidity to curb financial risks after debt surged to almost 250 percent of gross domestic product.
"China's unfinished economic agenda is almost all deflationary," said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. "As China reflates this will be the anchor that keeps inflation from going too high."
Though Citigroup sees global inflation rising to 2.8 per cent next year from an estimated 2.2 per cent in 2016, there's also potential turbulence for that trajectory. Risks include tightening financial conditions as the dollar and U.S. interest rates rise, greater international tensions including possible trade wars, and the risk that populist, anti-globalization political parties gain power or influence policies in countries including France and Italy, economists led by Willem Buiter wrote in a recent note.
Commonwealth Bank of Australia's China and Asia economist Li Wei in Sydney still sees China's producer prices leaping to 6 percent by the third quarter next year. Underpinning the estimate are further increases in commodity prices, an improving external environment and Beijing's determination to maintain growth of at least 6.5 per cent through next year because of the 19th Party Congress of the ruling Communist Party and a leadership reshuffle that's likely to be unveiled early in 2018.
"We know that stimulus isn't going away, at least over next year," said Li, who estimates growth of 6.8 percent next year. "We can expect policy makers to try to maintain stable growth all the way through to the government reshuffle."
Calibrating stimulus to maintain employment while avoiding excessive inflation in goods and services or assets "will keep policy makers busy in the coming year," Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong, wrote in a recent note. "Fiscal/credit stimulus and the ongoing depreciation have shifted domestic price pressures to the upside" and policy will quickly pivot to stimulus should growth sag during the leadership transition.
Those likely to feel the biggest lift from rising producer prices in China would be the country's top five markets: the U.S., Hong Kong, Japan, South Korea and Mexico. When China inflates, the rest of Asia gets dragged along, says Loevinger.
"China has started to export inflation rather than deflation," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. It will do so through exports, "and increasing overseas prices will in turn affect costs for Chinese companies."