Traders On Alert For China Inflation Shock

Authored by Sofia Horta e Costa, Bloomberg reporter and commentator

China is about to unveil closely-watched inflation data, and, as in much of the world, policy makers will be hoping accelerating prices are transitory.

Figures due 9:30 a.m. local time will show China’s producer-price index rose to 8.5% in May, according to a Bloomberg survey of economists, the highest reading since Lehman Brothers collapsed in September 2008.

Economists are sanguine about the risks right now. Chinese factories are still absorbing rising costs rather than passing them on. The result is the consumer price index probably only rose to 1.6%, the survey shows.

That’s good news for a central bank that, according to ANZ Banking, lacks tools to deal with such supply-side price pressures. Globally, the prevailing view is that such sharp gains in producer prices is a short-term phenomenon driven by the restarting of economies and supply constraints, although warnings are growing that higher prices may become more sustained.

Beijing is dealing with a number of fronts at once as a result of pandemic-era stimulus. Much of the money pumped by central banks around the world is making its way into China’s borders, complicating Beijing’s efforts to put a lid on prices without abandoning market reforms. This has led to a tricky balance of using strong rhetoric and market expectation management instead of blunt intervention when it comes to tackling overheating in the yuan, crypto, housing and raw materials.

Wariness is creeping into the nation’s financial markets. The Hang Seng China Enterprises Index has fallen for five straight days, the longest losing streak since September. In June, the gauge is among the worst performing global benchmarks, along with the CSI 300 Index of mainland-listed firms.

China’s currency too has turned bearish after a strong rally pushed the PBOC to act to curb gains. The offshore yuan has lost 0.5% this month, the most in Asia. The government bond market is equally losing altitude, with the yield on the benchmark 10-year note increasing the most in six months on Friday.