China begins to shift its costs to the rest of the world and aggravates the global inflation bubble

China has for years been a cheap ‘factory’ supplying the developed world with the goods it demanded through large trade surpluses. An immense workforce, productivity growth and very low labor costs have prevented the growing demand from the West from being translated into runaway inflation, rather the opposite. However, now, this trend could be reversing, at least temporarily. China appears to have started exporting inflation to the rest of the world, which could further inflate the global inflation bubble that began to swell in early 2021.

Inflation is already at highs for more than a decade in the US and the Eurozone (in Spain at highs since 1992). The paralysis of investment during 2020 and the rapid recovery of demand in recent months has generated a global imbalance that is leading to a sharp increase in prices and a shortage of certain raw materials, food and inputs, which make the production of final goods. However, to date China had not contributed to intensifying this inflationary phenomenon, something that could have begun to change, according to the latest export data from the ‘Asian giant’.

The price of what China manufactures and sells to the rest of the world is very important. 15% of everything that is exported on the globe it comes out of the ‘Asian giant’ and, therefore, its export prices influence global inflationary pressures. “Until now, the price of Chinese exports has been kept under control despite the increase in Chinese import prices. However, how long can China continue to keep export prices stable,” point out Alicia García Herrero and Jianwei Xu, Natixis economists on a new note.

Everything indicates that Chinese companies have stopped reducing their margins (eating the higher costs) and have begun to pass the costs on to their international clients. “Although export prices have remained stagnant in the first half of this year, more than 40% of the growth in exports in August was due to higher prices and not to volume in August. In other words, the transfer of the prices of Chinese production to the final consumer abroad have already started “, say García Herrero and Xu.

China is suffering inflationary pressures from two different sides. Like the rest of the world, the rise in raw materials is making production costs more expensive for many companies that work or need these commodities to develop your core business. On the other hand, China is suffering an energy crisis that is raising the electricity bill (up to the ceiling allowed by the government) of the industries or, directly, is limiting their operating capacity through energy rationing, generating shortages and higher prices. high. To all of the above, another global phenomenon should be added, such as the increase in shipping costs, which also puts pressure on import prices in China and export prices.

Sectors most affected

From JP Morgan they expect that “the inflationary pressure of the PPI will remain high in the short term, since the electricity rationing could continue in the fourth quarter, especially in energy-intensive sectors, such as steel, cement and aluminum”, they highlight from JP Morgan.

This increase in costs in the ‘world factory’ is affecting different sectors in different ways, but it could end up being transferred in one way or another to almost all goods. For now, “at the sectoral level, the pass-through has been greater for capital intensive goods compared to labor intensive ones. The most obvious case is that of the mobile phone. The volume of mobile phones exported by China has decreased during the third quarter, but the price increase was so strong that the total value of mobile phone exports continued to accelerate, “they point out from Natixis.

On the other hand, the most labor-intensive goods have experienced a much lower pass-through from production prices to final prices, with one notable exception: footwear, mainly due to covid-19 restrictions that are passed on to the rest. from Asia and especially to Vietnam.

In the end, the rise in the price of some goods ends up influencing others, generating a shock wave of inflation which ends up affecting almost the entire universe of goods produced in the country. “Skyrocketing prices for mineral products, chemicals and metals can also affect producers of intermediate machinery. All of this will further increase the overall pressure on export prices as this group of products represents more than 50% of China’s exports “, they assure from JP Morgan.

Along with all of the above, there has been an unprecedented rise in shipping costs since late 2020, after the economy began to reopen. Although there are indications that shipping costs may be peaking, they are still very high, says the American bank’s monthly report.

“Taking into account all the above, the high internal inflation of the PPI due to the continuous production restrictions and a substantial increase in shipping costs point to a further increase in export prices, which will carry over to world inflation “, acknowledge JP Morgan economists.

The People’s Bank of China expects producer price rises to begin to ease later this year or early 2022. “Using these forecasts as a basis, there is a three-month window in which the lGlobal prices will remain vulnerable to a new rebound in China’s PPI. A positive feedback loop between import prices, the PPI and export prices that could contribute to higher global inflation “, say the experts at JP Morgan.

Even so, the full impact will not be fully reached to the European or American consumer until mid-2022. Several studies reveal that companies take about 6 months to transfer the increase in their production costs to final goods and services. Higher export prices in China will be pushing up inflation in the West, at least until the summer of next year.