Workers work in a swimsuit factory in Jinjiang, southeast China’s Fujian Province on Tuesday, September 28, 2021.
Feature China | Barcroft Media | Getty Images
There are signs of stagflation in China as prices continue to rise while the latest production data shows a slowdown in production, economists say.
China’s factory activity declined more than expected in October, shrinking for a second month, an official poll released on Sunday found. The official manufacturing purchasing managers’ index for October was 49.2, falling below the 50 mark that separates expansion from contraction.
Zhang Zhiwei, chief economist at Pinpoint Asset Management, said the production index had fallen to its lowest level since its release in 2005, excluding the 2008 global financial crisis and the Covid-19 outbreak in February last year.
In contrast, the producer price index has risen to its highest level since its publication in 2016, said Zhang.
“These signals confirm that China’s economy is probably already going through stagflation,” he said in a statement on Sunday.
Stagflation is when the economy experiences stagnant activity and accelerated inflation at the same time. The phenomenon was first recognized in the 1970s when an oil shock triggered a prolonged period of higher prices but sharply falling GDP growth.
“One worrying sign is the transition in inflation from input prices to output prices. Input price inflation has been high for many months, driven by rising commodity prices,” Zhang wrote. “But the jump from [the] The production price index in October is alarming. “
Read more about China from CNBC Pro
He said the indicated inflationary pressures are being passed on from upstream to downstream businesses. Upstream refers to input materials needed to manufacture goods, while downstream operations are those that are closer to the customer, where products are made and sold.
“We could clearly see the… industrial stagflation in China due to the increasing production index, at the same time we saw a sharp rise in the price index. So the industrial sector is clearly in a very difficult position, ”said Raymond Yeung, chief economist for Greater China at ANZ, told CNBC’s Squawk Box Asia on Monday.
According to the respondents to the PMI survey for the manufacturing sector, factory production has been slowed by reduced power supply, material shortages and high input costs, said C -ital Economics in a statement on Monday. China is currently facing a severe power crisis as it gr -ples with a coal shortage.
“This meant that companies had to continue to reduce their inventories and had longer delivery times. It is this scarcity and rising raw material prices in particular that lead to higher production prices,” said Sheana Yue, assistant economist at C -ital Economics.
– CNBC’s Eustance Huang and Yen Nee Lee contributed to this report.