China PPI (Producer Price Index) in July rose to 10% year-on-year, accelerating from 8.8% in June. This index is the highest rate of growth in 12 years. Prices of raw material, fuel and power were up 15.4%, food prices increased by 9.1%.

Last month, Chinese government has adjusted the electricity and energy cost across the country, in addition to high international fuel price, the PPI is even greater than we have predicted. Market demand is not the force that pushed up PPI, cost of production and fuel price indeed are the crucial factors. The effect of PPI would not pass through easily to CPI (Consumer Price Index) in short while, due to government's control of commodity prices and fierce market competition.

However, this reflects that many manufacture-based corporations will suffer huge losses from higher production cost and lower profit margin. In long term, we foresee that China will undergo inflation in many sectors of different industries.

One of China's heaviest industrial base in the east, Shandong province has recorded its greatest power shortage in a decade, which worsened to as much as 10.22 gigawatts (GW) on 30 Aug, a gap of almost 1/3 of the province's maximum demand. According to local power supply plants, 5 out of 8 generators have been idled due to limited coal supply, as the coal mines are severely short in supply and fall in quality. Since May of this year, many industrial firms were forced to cut their hours of power usage in order to ensure electric power for local residents and key users linked to national security.

The power supply tightness is unlikely to ease as demand is expected to increase along with rising summer temperatures while coal stocks were unlikely to fulfill in short term. It will undoubtedly bring impact to all manufacturing industries.

The State Administration of Taxation (SAT) and Ministry of Finance (MOA) publish a new policy on the official website that 40 export products' tax refund has cancelled from 2008-8-1 ; it means these products' tax refund has been adjusted from 5% to 0%. Dicofol, warfarin, methomyl, thiodicarb, carbofuran, acephate and other agrochemicals are in the list. These agrochemicals is “high-polluting, high environmental risk” products, The State Environmental Protection Administration of China has urged SAT and MOA removed export tax rebates for the listed products and ban the processing trade (refer to Psyche news on 2008-3-7 ). We estimate this adjustment could make a 6% rise of export price to these products at least.

name of products

1 dicofol, chlorobenzilate, bromopropylate

2 sodium diphacinone, diphacinone, chlorophacinone Na

3 isofenphos-methyl, acephate

4 methomyl, thiodicarb, aldicarb, ethiofencarb, oxamyl, methiocarb and so on

5 warfarin, brodifacoum, flocoumafen, coumatetralyl, difenacoum and so on

6 coumaphos, santonin, bromadiolone, ofurace, thifluzamide, fthalide and so on

7 carbofuran