China threatens to export inflation


Today we look at whether Chinese factories are set to fan global inflation, Republican concerns over rising prices in the U.S. and the demographics of patent-applications.
As investors turn increasingly skittish on the U.S. inflation outlook, they’d do well to keep an eye on trends in China too. What they see may not ease their frayed nerves.

“Everything has gone up in price,” says Bryant Chan, whose factory in China’s Guangdong province turns out Nerf guns, LeapPad toy tablets, and other playthings for major American brands.
Manufacturers like Chan have been absorbing some of the rising costs of things like paint, screws, metal and packaging for months, providing a buffer for global inflation. But as Enda Curran writes, some are now starting to pass on their rising input costs to overseas customers.
The risk then is that China becomes a wholesale exporter of inflation. There’s intense competition for orders, so many factory bosses are wary of raising asking prices and will keep taking the hit to margins instead. But there already appears to be some pass through.
China’s producer price index climbed by the most since 2017 in April, with everything from big-ticket items like oil and metal to components such as screws and cardboard shooting up. A U.S. gauge of prices for imported goods from China rose 1.8% in March from a year ago, the biggest gain in almost nine years.
Economists expect the April U.S. CPI reading due Wednesday to shoot up to 3.6% from a year earlier, magnified by a depressed reading last year. Month on month, the gain is expected to be a far more modest 0.2%.
Federal Reserve officials — who were out in force Tuesday to eschew any talk of reducing monetary stimulus — have been downplaying the inflation threat.
Still, with President Joe Biden’s stimulus and the economy’s rebound already fanning price risks, the last thing the Fed needs is imported inflation.
Which is why guys like Wilson Lam, whose factories in Shenzhen make packaging for global cosmetic and perfume brands and metal caps and other accessories for whiskey and cognac bottles, are worth listening to.
“I don’t think we can absorb all of these cost increases,” says Lam, director at Chi Kwong (Luen Kwong) Metal Products & Electroplate Factory Ltd. “It’s just a matter of time before we pass them on to our customers.”
— Malcolm Scott

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