China's producer price index (PPI) rose 4.1% in June, marking the largest increase in four years. Despite a decline in international oil prices, increased investment in artificial intelligence (AI) has driven demand in advanced manufacturing, contributing to the rise in producer prices.
According to the National Bureau of Statistics of China, the PPI for June was up 4.1% compared to the same month last year. This figure also exceeded last month's 3.9% increase, which was the highest in nearly four years, aligning with expectations from the Wall Street Journal.
The continued rise in China's PPI for four consecutive months indicates a significant easing of the downward pressure on producer prices that had persisted for 41 months since October 2022.
However, the PPI fell 0.3% from the previous month. The decline in international oil prices led to a 16% drop in crude oil extraction prices and a 3.1% decrease in refined petroleum product prices, both of which saw an expanded decline compared to the previous month.
Despite the drop in oil prices, increased investment in AI data centers and power infrastructure has boosted demand for electrical equipment and machinery, leading to price increases in advanced manufacturing.
Dong Lijuan, a senior statistician at the National Bureau of Statistics, stated, "As the trend of industrial upgrading continues, the application of AI and the use of new materials are expanding, and the push for green transition has led to price increases in some industries." Specifically, prices for advanced manufacturing items such as VR equipment (up 8.4%), wearable smart devices (up 3.4%), industrial computers and systems (up 3.3%), and industrial robots (up 0.5%) all rose.
Shu Tianchen, a senior economist at the Economist Intelligence Unit, told CNBC, "With international oil prices generally declining, the potential for further increases in the PPI is limited. The high year-on-year growth rate reflects the low base effect from last year." He added that due to ongoing domestic weakness, "companies are unable to fully pass on cost increases to their clients."
In fact, the consumer price index (CPI) for June rose 1.0% year-on-year, slowing from a 1.2% increase in May. The Wall Street Journal had predicted a 1.2% rise, similar to the previous month. Month-on-month, the CPI also fell 0.3%, a larger decline than the 0.1% drop in May. This slowdown was influenced by falling international oil and precious metal prices, as well as stable food prices.
Due to a prolonged slump in the real estate market, consumer sentiment has weakened, leading to monthly CPI figures remaining in the 0% range or negative growth throughout last year. However, this year, rising energy prices and strong service and non-food prices have resulted in CPI growth rates in the 1% range.
The widening gap between producer and consumer prices indicates that the recovery of the Chinese economy is heavily skewed towards supply. While AI and advanced manufacturing investments are driving up producer prices, sluggish domestic recovery means companies are unable to adequately reflect cost increases in product prices. If this trend continues, concerns arise over potential declines in manufacturing profitability.
Although domestic recovery is slow, the economy is being supported by exports and advanced manufacturing, leading to expectations that the Chinese government will not introduce large-scale stimulus measures in the near term. The Chinese leadership is set to evaluate the economic performance for the first half of the year and outline economic policy directions for the second half at a meeting of the Central Political Bureau of the Communist Party of China later this month.
Meanwhile, the International Monetary Fund (IMF) raised its forecast for China's economic growth from 4.4% to 4.6% on July 8, citing that "advanced technology manufacturing, export performance, and public infrastructure investment are driving economic growth." This adjustment suggests a higher likelihood of achieving the Chinese government's growth target of 4.5% to 5% for the year.
* This article has been translated by AI.
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