China’s manufacturers face 35% surge in fuel processing costs as inflation hits highest since 2022

China’s manufacturers are facing a rough time, as fuel processing costs surge by 35%, while the prices producers charge climbed at their fastest pace since June 2022, thanks of course to the war in Iran.

China’s October producer price index rose 5.7% from a year earlier, according to data from the National Bureau of Statistics released on Monday.

That was above the 5.3% economists expected in a Reuters poll and up from 5.0% in September. It also marked the third straight month of faster producer inflation. The last higher annual reading was 6.1% in June 2022, according to LSEG data.

China’s factories pay more, but shoppers aren’t picking up the bill

Mining and raw materials saw the biggest increases. With the Middle East conflict keeping oil and gas expensive, coal miners, natural gas producers, petroleum processors, and chemical companies are all facing heavier operating expenses.

Factories that guzzle energy are facing the same pinch too. The cost of production is increasing everywhere.

Ordinarily, businesses would try to recover those costs by charging buyers more. The problem is that Chinese households are still watching their spending. Price hikes could cost companies sales. Factory inflation is racing ahead while store prices barely move.

The consumer price index rose by only 0.7% year-on-year in October compared to a rise of 0.9% in September and below economists’ estimate of 0.8%. The core CPI, which removes food and energy prices, fell to 0.8% from 1.0%.

However, there have been some encouraging figures reported in other countries. China’s economic growth came in at 4.6% in Q3 compared to analysts’ expectations. September retail sales also came in stronger than forecast. But exports cannot fix weak domestic spending. Foreign demand can also turn suddenly if trading partners impose new restrictions or overseas buyers cut their orders.

The official data shows that external shocks are having a growing effect on the economy and that the mismatch between strong supply and weak domestic demand remains serious.

Then there is the stock market, where AI stocks are crashing as investors question demand and weigh export restrictions targeting Chinese technology. Those losses could hurt confidence. Government market support has yet to restore it. Still, the CSI 300 rose 0.56% after Monday’s inflation figures were released.

Banks fight the yuan’s rise as carmakers look beyond China

In addition, China’s exporters have another costly problem because the yuan has appreciated, cutting into their already slim profit margins for products sold abroad. Efforts have been made to curb this appreciation, but banks are now providing another incentive to keep dollars instead of converting them into local currency.

According to bankers, more than six banks, including state-owned, joint stock, and foreign banks, have increased dollar deposit rates in recent weeks. And some of these dollar deposit rates exceed those of the US, hitting levels not seen since at least 2023.

The country’s automakers are showing just how much businesses are leaning on foreign customers. According to the China Passenger Car Association, passenger vehicle exports reached 932,000 in October, a 68.2% increase from a year earlier. September exports totaled 923,000, up 73.2% annually. So exports are still growing rapidly, even though the pace has cooled.

Back home, it is a very different story. Domestic passenger car sales plunged 27.3% to 1.65 million in October. That was slightly less severe than September’s 28.1% drop, but it marked the 12th consecutive month of declines. Carmakers can sell more abroad, yet the crowded home market keeps putting pressure on prices and profits.

BYD’s global sales have been slower in October, and third-quarter profit growth has failed to meet forecasts as the competition has heated up both in China and outside of it. BYD also wants to cater to richer customers, as its Yangwang luxury sedan made an international debut in Dubai on Friday.

It is getting easier to see who the winners and losers of this game are. Record sales in October were recorded by Leapmotor (9863.HK), Xpeng (9868.HK), and Xiaomi (1810.HK). By contrast, deliveries have dropped at the car brands part of the Huawei’s Harmony Intelligent Mobility Alliance, Li Auto (2015.HK), and Nio (9866.HK).

Following this year’s disappointing decline, the domestic automobile market will experience only modest growth in 2027.