The three-point gap
In August the factory-gate index in China stood 3.8 per cent above a year earlier and 0.4 per cent above the previous month, and the prices producers paid for their inputs rose 5.8 per cent over the year. In the same month the consumer index rose 0.8 per cent over the year, food prices fell 1.4 per cent and core prices excluding food and energy rose 1.0 per cent. Roughly three points separate what the producer receives at the factory gate from what the household pays at the till, and that distance is the subject here.[1], [2]
The pressure comes from the extraction end. Coal mining prices stood 26.6 per cent above a year earlier, non-ferrous metal smelting and processing 20.8 per cent, oil and natural gas extraction 10.5 per cent and chemical manufacturing 9.1 per cent. Production materials added about 3.92 percentage points to the annual factory-gate change while consumer goods took about 0.10 percentage point off it. In the branches that sell to households prices are falling: food manufacturing by 1.2 per cent, alcohol and beverages by 5.3 per cent and motor vehicles by 2.2 per cent.[1]
Set aside the assumption that a cost shock climbs the chain on its own. The branches that buy coal, metals and chemicals and sell to households are cutting their own prices while their inputs get dearer, so the increase in input costs is being held inside the production chain instead of being passed to the till. The gap sits in the margin between input and output, and it is squeezed at the consumer-goods end of manufacturing. The rival reading deserves a hearing: administered energy tariffs and ordinary pricing lags may defer a pass-through by a quarter or two, in which case the cost has been postponed rather than absorbed. The two readings part company from here, and the monthly series separates them.[1], [2]
Where is the demand coming from?
Outside the price series, the volume found a buyer. Exports rose 25 per cent from a year earlier in dollar terms in August, faster than the 23.9 per cent of the previous month, and imports rose 28.2 per cent. The monthly trade surplus widened to 119.09 billion dollars from 112.5 billion dollars, and the cumulative surplus for the first eight months reached 805.51 billion dollars. Over the same eight months exports of high-technology products rose 42.9 per cent in dollar value, and semiconductor export values more than doubled while volumes rose only 4.1 per cent.[3]
Effective demand is the missing term. Domestic consumption is not taking the extra volume at a higher price: services prices rose 0.8 per cent over the year, food prices fell 1.4 per cent, and the one line where the household plainly feels the energy shock is transport fuel, 8.3 per cent above a year earlier and 6.6 per cent above the previous month. The foreign buyer took the volume. Zhaopeng Xing of ANZ attributes part of the strength to companies rushing goods to the United States because of tariff uncertainty. A surplus of that size is another sector's deficit by accounting identity, which is why it is argued over abroad rather than simply observed.[3], [2]
What to watch next
The two readings may separate within a quarter. If the cost is being absorbed inside manufacturing, producer prices for consumer goods will stay in negative territory in the September and October data while coal and non-ferrous metal prices remain high; if the pass-through has only been postponed, the consumer-goods branches will turn positive first and the food manufacturing line will move before the shelf price does. The concrete indicator to watch is the contribution of consumer goods to the factory-gate index, which took about 0.10 percentage point off the August figure.[1]
The question underneath is an old one: when does a cost shock become a wage-price process, and which balance sheet carries it before demand breaks? In the August data the answer looks like this: the producer carries the load, the foreign buyer takes the goods, and the household is touched mainly through the pump. The arrangement stands while margins have room and external demand holds; the accounting identity says nothing about how much room is left.[2], [1]