China exits factory deflation

China’s factories just posted their first year-on-year price increase in 41 months, but the jump came from a war-driven oil shock, not from Chinese shoppers suddenly buying more washing machines, cars, or apartments. In March, China’s producer price index rose 0.5% from a year earlier after falling 0.9% in February. (gov.cn) Producer prices are the prices factories charge when goods leave the gate, before stores add their own markups. When that number rises because crude oil, metals, and chemicals get more expensive, manufacturers feel it the way a bakery feels a sudden spike in flour prices. (gov.cn) (bloomberg.com) The trigger was the Iran war, which disrupted oil supply and pushed up global energy costs in late February and March. Bloomberg reported that the surge in energy costs was enough to end more than three years of factory-gate deflation in China. (bloomberg.com) (nytimes.com) That is why economists are treating this as cost-push inflation instead of a clean recovery signal. If demand were reviving, you would expect stronger household spending, firmer property activity, and broader pricing power, not just a bill for imported fuel and raw materials. (straitstimes.com) (bloomberg.com) China’s money market is flashing the same warning. Bloomberg said the overnight repurchase agreement rate fell to a near three-year low, and its gap with the People’s Bank of China’s de facto seven-day policy rate widened to the biggest since September 2024, which usually means banks have cash they are struggling to lend out. (bloomberg.com) A money market is where banks borrow from each other for very short periods, often overnight, to square their books. When that rate sinks even after the central bank tries to drain liquidity, it can mean the system has too much cash chasing too little loan demand. (bloomberg.com) That makes March’s inflation print look less like an engine restarting and more like a fuel bill arriving. Factories can face higher input costs at the same time that households and businesses stay cautious, which squeezes margins instead of lifting growth. (bloomberg.com 1) (bloomberg.com 2) Markets have still treated China more calmly than many other places during the conflict. CNBC reported that the 10-year Chinese government bond yield stayed broadly stable at 1.81% after the fighting began, while the 10-year United States Treasury yield climbed to 4.297%, and Chinese assets held up better than many peers. (cnbc.com) That resilience has a specific backstory: China spent years building buffers, including strategic stockpiles, broader energy sourcing, and policy support aimed at reducing financial fragility. Those defenses can steady bonds and stocks during an external shock, but they do not automatically create stronger loan demand inside the domestic economy. (cnbc.com) (chathamhouse.org) So China now has an unusual mix: factory prices are rising, interbank cash is abundant, and credit demand still looks soft. That combination says the country may be importing inflation from abroad even while growth at home remains too weak to absorb it comfortably. (gov.cn) (bloomberg.com) (cnbc.com)