A recent surge in wholesale prices has been observed in China, marking the fastest increase in nearly four years, primarily attributed to soaring raw material costs amid the ongoing conflict in Iran and a boom in artificial intelligence investments. The producer price index (PPI) rose by 3.9% year-on-year in May, exceeding economists’ predictions of a 3.8% increase and significantly up from the 2.8% increase seen in April, according to data from the National Bureau of Statistics.
This sharp rise in wholesale prices comes after a period of deflation that lasted decades, with March marking a return to growth in these prices. The conflict in the Middle East has heavily impacted trade routes, particularly through the Strait of Hormuz, which has disrupted the flow of energy and raw materials critical to industries.
Among the key contributors to rising costs is the significant increase in prices for fuel and power, which jumped 10% from a year earlier, up from a 4.4% increase in April. Additionally, non-ferrous metals experienced a remarkable 22% rise in prices. The growing demand for artificial intelligence computing has also fueled price increases for tech equipment and semiconductors. Dong Lijuan, chief statistician at the NBS, noted that the transition towards electrification and increased AI adoption have amplified prices across various sectors, including non-ferrous metals and electrical machinery.
On the consumer front, prices increased by only 1.2% in May, failing to meet expectations of a 1.3% rise, and reflecting a slight month-on-month decrease of 0.1% from April. Gasoline prices saw a notable increase, rising 23.5% from the previous year, while core consumer price index growth remained modest at 1.1%, down from 1.2% in April. Food prices also saw a decline of 1.7% year-over-year. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, indicated that inflationary pressures from rising energy costs are manageable due to weak domestic demand.
The stock markets reacted to the economic indicators, with the CSI 300 index falling about 1% and the Hang Seng Index declining by 0.8%. The yield on the 10-year Chinese government bond remained stable at 1.740%.
China has managed to navigate some of the challenges posed by rising energy costs by leveraging its strategic oil reserves and diversifying its energy portfolio with renewable sources. The nation, the largest global oil importer, has reduced crude imports by nearly 20% since the onset of the Iran conflict, helping to stabilize global oil prices.
Despite the overall resilience demonstrated by export growth, which rose 19.4% in May—an increase driven by demand for renewable and AI-related products—economists have cautioned that ongoing supply-driven inflation could place additional pressure on corporate profit margins and hinder household consumption. Analysts like Josh Gilbert from eToro emphasized that factories in China face rising costs while struggling with insufficient demand, which could hinder recovery efforts.
Consumer spending remains cautious, as evidenced by high household savings rates, which have led to subdued expenditure. Signals from global luxury brands like Ralph Lauren and LVMH have shown some recovery in demand for high-end products; however, economists remain wary, attributing this recovery to temporary factors such as recent market rallies rather than a robust turnaround in consumer sentiment. Neo Wang of Evercore ISI advised caution, emphasizing the fragile nature of these early signs of recovery in light of ongoing challenges in the property market and employment sector.
