China's producer prices drop 4.6% in May, hitting lowest level in seven years

China’s producer prices experienced a substantial decline of 4.6% in May compared to the same period last year. This marks the lowest level in seven years. The sharp drop in producer prices indicates weakened pricing power for Chinese manufacturers, signaling potential challenges across various sectors. It raises concerns about profitability, investment, and employment prospects, as businesses face intensified pressure on their margins.

The decline in producer prices can be attributed to several factors, including global economic uncertainties, trade tensions, and the lingering impact of the COVID-19 pandemic. These factors have disrupted supply chains, dampened demand, and created a fiercely competitive environment for Chinese industries.

Ting Lu, Chief China Economist at Nomura in Hong Kong, said to WSJ that local banks will soon lower key lending rates. China’s central bank governor Yi Gang indicated that he expects consumer price inflation to gradually increase in the second half of the year, potentially exceeding 1% by December.

Persistent deflationary pressures can have detrimental effects on an economy, discouraging consumer spending and investment, which can result in a cycle of declining prices and economic contraction. The repercussions of China’s producer price decline may extend beyond its borders. As Chinese goods become more price-competitive in the global market, it could intensify competition for industries in other countries. Additionally, the reduced import prices from China may alleviate inflationary pressures in importing nations, offering some respite for economies grappling with elevated inflation rates.

China’s wood furniture exports decreased by 9% to $6,764.7 million during the January-April 2023. Country’s exports of wood furniture to the U.S. lost 17.0% to $2,035.3 million.

The volume of lumber imports to China expanded 8.5% year-on-year to 9,109.5 thousand m3 in the first four month of 2023. Meanwhile, the value of imports contracted 5.1% to $2,332.2 million and the average price of lumber, according to Lesprom Analytics, decreased 12.5% to $256.0 per m3.