Producer price expansion could reflect improving industrial profits, experts say

China's factory-gate inflation picked up moderately in April for a second consecutive month and may point to stable economic expansion and improving industrial profits, experts said.

The producer price index rose to a four-month high of 0.9 percent year-on-year last month, up from 0.4 percent in March, with the extractive industry leading the rise, the National Bureau of Statistics said on Thursday.

On a monthly basis, producer prices rose 0.3 percent in April, faster that the 0.1 percent increase in March, the NBS said.

Liu Chunsheng, an associate professor at the Central University of Finance and Economics in Beijing, said the PPI rise may be attributable to this year's economic recovery and supportive macro policies.

"On the other hand, the stumbling global economic recovery has weighed on prices of some bulk commodities, constraining the PPI from a higher rise," Liu said.

Niu Li, deputy head of the Department of Economic Forecasting at the State Information Center, said the moderate rise in the PPI means producers charged more in April and probably reaped higher revenues and profits.

Looking ahead, as the effect of value-added tax cuts－which affected enterprises starting from April 1－filters through, the PPI may continuously recover in the remaining quarters of this year, said Hua Changchun, chief economist at Shanghai-based Guotai Junan Securities.

"As the PPI highly correlates with industrial profits, further improvements in industrial profits can also be expected," Hua said in a research note.

In March, industrial profits rose 13.9 percent year-on-year to 589.5 billion yuan ($86.4 billion), reversing a decline of 14 percent in the January-February period, the NBS said.

Despite potential improvements, experts said this year's PPI may still remain at a relatively low level, 1 percent or below.

"The PPI is closely related to enterprises' investment confidence, whose recovery often lags behind the ease in downside pressure," said Dong Dengxin, a professor at Wuhan University of Science and Technology.

The consumer price index, a gauge of inflation, rose 2.5 percent year-on-year in April, up from 2.3 percent in March, setting a half-year high as tighter supplies of pork, vegetables and fruit drove up food prices, the NBS said.

Pork prices rose 14.4 percent in April from a year earlier due in part to the African swine fever outbreak, driving the CPI up by 0.31 percentage point, the bureau said.

On a month-on-month basis, consumer prices edged up 0.1 percent, compared with the 0.4-percent drop seen a month earlier.

The CPI is on a mild inflationary trajectory, an indication of economic stability, Niu said, adding that China is likely to retain a generally stable inflation level this year, despite the expected continuation of pork price rises.

Experts projected that pork prices may rise by more than 70 percent year-on-year in the second half of the year, the Ministry of Agriculture and Rural Affairs said in April.

As domestic and external uncertainties may still weigh on domestic demand, and prudent monetary policy will work to prevent liquidity overflow, the rise in pork prices itself is unlikely to pose major inflationary pressure, Niu said.

Nevertheless, Liu from the Central University of Finance and Economics, cautioned about the need to monitor and control inflationary risks brought on by rising pork prices as these may directly affect people's lives and elevate prices of other commodities.

"The Chinese economy is gradually stabilizing, during which policymakers should properly react to various uncertainties, including the ongoing trade tensions," Liu said.