By Michael Lelyveld
China is walking a tightrope between economic growth and inflation as industries face the promises of climate change and commodity prices soar.
April’s ex-factory price readings may have served as a warning of rising costs to come. The Producer Price Index (PPI) jumped 6.8% from the previous year, its biggest increase since 2017.
The Consumer Price Index (CPI) rose at a slower pace of 0.9%, weighed down by falling pork prices, even though the pace was still the fastest in seven months.
The CPI sent mixed signals of a still limited recovery in consumption after the COVID-19 crisis a year ago. The lag in PPI growth suggests that manufacturers’ profits will decline if material costs continue to rise.
Higher commodity costs have been the main culprit behind strong price growth over the past year for crude oil, iron ore, copper and coal inputs.
But the Chinese economy and the stimulus policies that drive it have been behind the costs, as record production of manufactured goods like crude steel rose to nearly twice the rate of GDP last year.
Stellar economic growth forecasts for this year have added to price expectations. In April, the International Monetary Fund raised its projection for 2021 to 8.4%, up 0.3 percentage point from its January forecast.
Growth in gross domestic product in the first quarter reached 18.3%, rebounding from a record drop of 6.8% a year earlier. Industrial production in April rose 9.8%, the National Bureau of Statistics (NBS) said.
Raw material demand
The outlook suggests that Chinese manufacturers will maintain demand for more raw materials regardless of the effect on prices.
“China is dependent on imported raw materials,” said Derek Scissors, Asian economist and resident researcher at the American Enterprise Institute in Washington.
“Due to the uncertainty of global supply, there is going to be upward pressure on commodity prices for the rest of the year at least,” Scissors said. “(It’s) kind of inflation,” he said.
May 18, the official English language China daily cited analyst concerns that “rising commodity prices are starting to erode growth and require targeted policy support.”
NBS spokesman Fu Linghui noted that retail sales growth in April “slowed”, falling sharply to 17.7% from 34.2% in March. In real terms, the average annual growth rate over the two-year period going back to pre-pandemic conditions was only 2.6%, the NBS said.
Climate change is probably another factor behind the price hikes.
Although advocates, including UN Secretary-General Antonio Gutteres, have argued that renewable energy sources are already cheaper than coal for power generation, some of the steps China is taking to reduce industrial carbon emissions seem to drive up prices.
In the steel industry, China has imposed tariff changes aimed at pressuring producers to reduce both capacity and production to cut emissions at a time when the government continues to push for consumption. increased to stimulate growth.
The measures would have triggered stockpiling ahead of the changes, sparking iron ore prices, while the conflict over targets threatens to limit steel supplies, sparking shortages rumors.
Iron ore futures prices have climbed 34% this year while hot-rolled steel coil costs have climbed 38%, Reuters reported on May 14.
Concern over export prices
The apparent contradictions in Chinese policies have turned into international concerns about rising export prices.
The risk of inflation is the latest example of the global consequences of China’s growing dominance over the manufacturing sector.
“Investors are increasingly concerned that the stimulus measures induced by the pandemic could overload global inflation and force central banks to tighten their policies, which could dampen the recovery,” Reuters said.
In a quarterly report, the People’s Bank of China (PBOC) acknowledged the threat of inflation but cited overriding concerns.
“Consumption by residents is still limited and investment growth is insufficient,” the central bank said, according to a translation from CNBC.
The quote suggests that the PBOC is more concerned with signs of weak economic recovery than the risk that consumer prices will exceed its target limit of 3% for this year.
So far, the PBOC has shown no signs of tightening its policies and is unlikely to do so as long as consumption growth slows and small and medium-sized businesses have insufficient access to loans. But the position may run the risk of sweeping inflationary pressures under the rug.
“The central bank will maintain a prudent monetary policy that is flexible, precise, reasonable and moderate, and will prioritize supporting the real economy,” she said on May 11, adding that “it will walk on a fine line between economic recovery and risk control, ”the official Xinhua news agency reported.
“Unlikely price crisis”
Until recently, the government played down inflation concerns, also calling a price crisis “unlikely.”
“With the phasing out of time-bound fiscal and monetary policies and the absence of flood-like stimulus measures, China does not have the basis for (a) a sharp rise in prices,” China daily quoted the NBS spokesperson.
Yet the government has resorted to extraordinary measures to contain increases in the price of coal that could reduce profits and curb consumption.
Thermal coal prices climbed 20% in the month to May 10, Reuters said, prompting at least three Chinese coal indexes to suspend daily quotes in hopes the blackout would cool prices down.
On May 17, Xinhua reported that the China Taiyuan Coal Transaction Center in Shanxi Province said its index rose more than 6% from the previous week, capping price increases in five consecutive weekly periods.
On Monday this week, the index again rose at a slightly slower pace of 4.67 percent.
Gradual job loss
But Derek Scissors argued that commodity inflation will not affect all aspects of the economy in the same way.
“Commodity inflation hurts the most inefficient and oversized sectors of the economy. They should shrink, ”Scissors said. “The loss of jobs will happen gradually as inflation eats away at sustainability,” he said.
“The workforce is shrinking and aging, and should move away from heavy industry. This is a local political issue, not a national economic issue,” he said.
But at a state cabinet-level executive meeting on May 19, Premier Li Keqiang expressed the government’s growing concern about the effects of rising commodity prices.
“The government must take the negative impact caused by the price increase very seriously,” Li said, quoting Xinhua.
“We need to carefully analyze the reasons for this rapid rise in commodity prices and focus on the crux of the matter,” Li said, suggesting that the government was still at an early stage of unraveling its conflicting policies.
The meeting ended with a warning that the spiral could lead to speculation, shortages and the threat of intervention.
As the market continues to play a key role in the allocation of resources to ensure the supply of raw materials and keep their prices stable, the government needs to take better responsibility.
“All monopoly and hoarding will be suppressed under the law to strengthen market regulation,” Li said.