Opportunities in Record High PPI

Translated by Liu Peng
Original article: [Chinese]

In July, the consumer price index (CPI) rose by 6.3% year-on-year, lower than the market expected rate of 6.5%. However, the producer price index (PPI) hit a twelve-year high at 10% for the same period, one percent higher than market expectation.

What do these indexes signify for Chinese enterprises?

Majority of the economists expected the PPI to have nearing its peak and would likely drop gradually over the next few months; the same was expected of CPI.

One of the factors pushing up PPI originated from pricey resources. Though the global crude oil prices had dropped below 115 dollars per barrel, the distorted prices for Chinese domestic crude and processed oil remained unchanged.

In addition, coal prices continued to soar, adding pressure for electricity prices to surge. In other words, though inflationary pressure for consumers appeared to be easing, prices for production raw material and resources would take some time to adjust.

In that case, the PPI would likely remained high for some time. Coupled with a gradually declining CPI, it signified that downstream industries have been facing fiercer competition and unlikely to transfer the climbing costs to consumers.

Judging from that, the biggest beneficiaries under the current prices adjustment for resources would be central government's state-owned enterprises(SOEs), especially those in the field of oil and gas, electricity, and metals.

Though the state's temporary price intervention measures on processed oil products and electricity had greatly depressed the profits of SOEs in these two industries, SOEs like oil giant Sinopec was compensated with huge government subsidies.

If prices that had been kept artificially low for these two sectors were to take time to adjust, upstream enterprises - mainly SOEs - would benefit. These enterprises are regarded as having great importance to national economic security and the people’s livelihood, thus remain under the control of SOEs and taken care of by the government.

On the contrary, enterprises in the downstream industries, especially manufacturers, would encounter more difficulties.

In July, the purchasing prices for raw material such as fuel and power, ferrous metals, nonferrous metals and chemical materials increased by 30.1%, 26.9%, 2.5% and 9.0% respectively year-on-year.

However, the end-product prices for clothing and daily commodities only rose by 2.4% and 4.3% respectively, and prices for durable consumer goods had even dropped by 0.2%.

The above figures signified that downstream manufacturers would be facing hard days ahead. It would be inevitable for some enterprises to go under and withdraw from the market before the cold days are over.

In other words, this would be a time to reshuffle various industries; while some would be eliminated, some might gain more market shares at the relatively lower cost.

Under these circumstances, SOEs would have an advantage of gaining even more market dominance, and that is a scenario that would please the State-owned Asset supervision and Administration Commission (SASAC).

As small and medium enterprises are hard pressed under the price intervention measures, the big enterprises with an edge would manage to survive the pressure and become even bigger, likely to emerge later as "dinosaur" in their respective fields.

In the post-Olympic era, SASAC is expected to launch another round of SOEs restructuring, and the move is likely to intensify the dominance of these enterprises.