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(Bloomberg) – Despite Beijing’s best efforts, asset bubbles are forming in China.

House prices are skyrocketing, prompting officials to revive the idea of ​​a national property tax. A surge in commodity prices prompted a commitment to increase domestic supply, strengthen market surveillance, and crack down on speculation and hoarding.

The quick wins call into question the central bank’s ability to contain inflation without raising borrowing costs or drastically changing monetary policy – something the People’s Bank of China said it would avoid. The risk is that the government’s attempts to curb price increases will not be enough, forcing the central bank to take control at a vulnerable time for domestic consumption.

It would be a shock to the country’s financial markets, which are pricing in a relatively benign scenario. The 10-year government bond yield fell to its lowest level in eight months, while the benchmark CSI 300 stock index is the least volatile since January. The calm contrasts with the rest of the world, where investors are increasingly obsessed with the reaction of central banks to the threat of an overheating global economy.

“How to mitigate the boom in real estate and commodities without tightening macroeconomic policy – this is a real challenge for the Chinese government,” said Zhou Hao, economist at Commerzbank AG in Singapore.

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More than 15 months after the pandemic forced China to cut rates and inject trillions of yuan into the financial system, policymakers in Beijing – like many others around the world – are facing the consequences. As the global economic recovery accelerates, some are forced to act due to inflation: Brazil in March became the first Group of 20 country to raise borrowing costs, with Turkey and Russia following suit not. Even Iceland raised its short-term rate in May.

Others, like the Federal Reserve and the European Central Bank, have insisted that the price spikes are only temporary. The PBOC also downplayed inflation concerns in its first quarter monetary report, released shortly after data showed factory prices jumped 6.8% in April – the fastest pace. fast since 2017.

What Bloomberg Economists Say …

“It will be a challenge for China to contain the rise in producer prices because few basic products are priced in the country. There is not much China can do, and even a tightening of monetary policy will not be able to change the situation, ”said David Qu, Chinese economist at Bloomberg Economics.

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While the rapid rise in commodity prices has moderated in recent days, continued gains could push companies to pass higher costs on to consumers, who are already spending less than expected. Analysts from Huachuang Securities Co. said in a May 9 report that the prices of consumer goods, such as household appliances and furniture, as well as electric vehicles and food, were rising. Still, there is little evidence of demand-induced pressures, with core inflation pushing out volatile food and energy costs, quite subdued.

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The threat of inflation – associated with a fragile economy – tends to be bad news for stocks because of how it erodes corporate earnings, and for bonds, it reduces the value of future cash flows. The acceleration in prices devastated the Chinese bond market in 2019 and contributed to a sharp sell-off in stocks in early 2016.

As a sign of the seriousness of the threat, the Chinese cabinet said on Wednesday that more work needed to be done to tackle rising commodity prices. A PBOC official said China should allow the yuan to appreciate to offset the impact of higher import prices, according to an article published on Friday. The currency is trading near an almost three-year high against the dollar.

Imported inflation is a headache for Chinese leaders who already face the risks caused by a surge in capital inflows. In recent years, Beijing has opened up investment channels to allow more funds to enter its financial system. The aim was to use the weight of foreign institutions to anchor its markets and stabilize its currency, but record liquidity released by global central banks in the wake of the pandemic is now putting pressure on prices in China.

This elicited strong language from senior officials. The main securities regulator, Yi Huiman, said in March that the large flows of “hot money” into China must be strictly controlled. That same month, banking regulator Guo Shuqing said he was “very worried” that asset bubbles in foreign markets would burst soon, posing a risk to the global economy.

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Deciding whether recent price spikes are temporary or a permanent move towards sustained inflation is an issue Chinese policymakers face. For now, Beijing’s current approach of pushing, boosting supply, and penalizing speculation appears to be aimed at the former.

“It is still too early to say whether China can contain the surge in producer prices, and if it cannot, whether it will have a large-scale impact on consumer prices,” said Raymond Yeung, Chief Economist for Greater China at Australia and New Zealand Banking Group Ltd. “Much of this inflation is imported – it’s not something that can be solved by the PBOC.”

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