China Pushes Back Against Threat of Inflation

Government presses industries to absorb higher commodity costs.
An analysis by Michael Lelyveld
2021-06-18
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China Pushes Back Against Threat of Inflation A Chinese bank employee counts new 50-yuan notes with a money counting machine at a bank counter in Hangzhou in China's eastern Zhejiang province on August 30, 2019
AFP

China's government has suffered a setback in its campaign against inflation as consumer prices accelerated last month despite pressure on producers to keep commodity costs down.

On June 9, the National Bureau of Statistics (NBS) reported that the consumer price index (CPI) for May rose 1.3 percent from a year earlier, quickening from the 0.9-percent pace the month before.

The increase was a sign that the government has had only partial success in keeping the surge in commodity prices from spilling over from production into the consumer market.

While consumer price growth remained relatively mild, the producer price index (PPI) soared 9 percent in May after climbing 6.8 percent in April.

The May mark was the highest monthly jump in factory gate prices since September 2008, reflecting a run-up in costs for commodities including oil, iron ore, copper and coal, the NBS said.

The bureau sought to downplay the PPI increase, arguing that one-third of the May rise was due to a "carryover effect" from April's results, so that only 6 percentage points of the May figure was actually "new."

But the month-to-month gain in the PPI more than doubled in May from April to 1.6 percent, suggesting continued pressure from commodity costs.

The CPI reading continued to benefit from lower pork prices, although overall food prices rose 0.3 percent after April's 0.7-percent decline.

Plunging pork prices prevented an even greater increase in the CPI. Weak demand and fears of the African swine fever have combined to push hog prices down by over 50 percent since January, the South China Morning Post said. From late May to early June, hog prices dropped 11.2 percent, the NBS said.

The growing gap between the PPI and CPI figures appeared to reflect the government's pressure on producers to absorb higher costs.

The National Development and Reform Commission (NDRC), the top planning agency, called for improving the government's "price control mechanism" to limit the impact on consumers from price hikes for essential goods.

On Thursday, the NDRC said it would release supplies of copper, aluminum and zinc from state reserves to "ensure stable prices" of non-ferrous metals.

While price controls may limit CPI increases in the near- term, they are likely to erode producer profits, setting the stage for shortages, more price pressures and slower economic growth.

Ten days earlier, the NBS recorded a slight drop in the official purchasing managers' index (PMI) for manufacturing in May to a reading of 51 from 51.1 in April. A mark above 50 indicates economic expansion while readings below 50 signal contraction.

In March, the PMI reading for manufacturing was a stronger 51.9, the highest level so far this year.

Slowed growth

Economic indicators released this week showed signs of a slower growth pace.

Industrial output in May rose 8.8 percent from a year earlier, edging down for the third month in a row. Reuters reported. Retail sales advanced 12.4 percent, missing a consensus analysts' forecast, CNBC reported.

Inflation pressures may pose a challenge for China's full economic recovery this year. The International Monetary Fund has forecast growth of 8.4 percent while the government has set a more conservative target of "above 6 percent."

"While Chinese factories gained a larger share in global exports last year, economists say they are struggling to keep up with surging raw-materials costs. These have pinched profit margins, forcing some manufacturers to lift prices and others to temporarily halt production," The Wall Street Journal reported on May 26.

China has pointed to rising prices abroad as the source of its problems.

Last week, the U.S. Labor Department reported that CPI in the United States also rose 5 percent in May from a year before. But reactions from U.S. regulators have differed from those in China, where the government has threatened to intervene in the market with various forms of price controls.

U.S. officials have voiced confidence in market forces and the nation's recovery from the COVID crisis.

"Today's data on inflation is the latest indicator that things are both moving in the right direction and that we have supply-chain hiccups," said Heather Boushey of the White Council of Economic Advisers in a tweet reported on June 10 by The Washington Post.

After a two-day meeting this week, the U.S. Federal Reserve left near-zero benchmark interest rates unchanged but signaled that plans for increases could be moved up to 2023 from 2024 to keep recovery-driven inflation in check.

By contrast, Premier Li Keqiang took a tough stand against price hikes last month following executive meetings of the cabinet-level State Council as the government threatened a crackdown.

On May 19, a government statement pressured commodity traders and industrial consumers with harsh penalties if prices continued to rise.

"The regulation of the futures and spot markets will be better coordinated and targeted measures will be taken when appropriate to screen abnormal transactions and malicious speculation. Irregularities such as making monopolistic deals, spreading false information, price gouging and hoarding will be dealt with to the full extent of the law and brought to light," the official China Daily said.

On June 4, Bloomberg News reported that Chinese officials "have unleashed a near-constant barrage of rhetoric and administrative measures to rein in the commodities surge."

"Officials have raised transaction fees, changed tax rules, censored industry research, urged producers to sell inventories, cajoled trading firms to cut bullish wagers, vowed to clamp down on 'malicious' speculators and more," Bloomberg said.

Some analysts' have minimized the impact of higher prices on the economy, forecasting that the spikes will be short- lived.

Economists at Morgan Stanley estimated that the PPI would peak at around 8 percent in May or June but decline to 4 percent in the second half of the year, the Morning Post reported on May 27. According to the NBS report, the PPI peak estimate has already been exceeded.

While producer price growth may diminish, it is unclear how successful the government will be in keeping the pressures from spilling over into consumer prices.

In the power sector, analysts will be watching to see how the government responds to a jump in coal prices after the China Taiyuan coal transaction price index rose nearly 14 percent in May.

Last week, Bloomberg reported that the government has considered imposing a cap on prices that coal mines would be allowed to charge.

The government has also sent inspectors to major coal ports to "crack down on illicit hoarding," Reuters reported.

Electricity rates

Over the past three years, the government has cut electricity rates for businesses to pump up profits and economic growth, forcing generating companies and the State Grid to absorb the costs.

The government may be faced with similar forces as it decides how to pay for higher-priced coal during the peak period for power demand this summer. Five provinces have issued warnings about potential shortages, Platts Commodity News said.

Hong Kong manufacturers have experienced "blackouts in several regions" with peak demand at record levels for three weeks, the Morning Post reported on June 3.

"This has caused power rationing for two days a week in some areas, forcing owners to keep factories running at weekends or resort to diesel generators to maintain production," the paper said.

The price squeeze on coal comes at a sensitive time as the country celebrates the centennial of the Communist Party of China (CPC) on July 1.

"Given the imminent celebration of the 100th anniversary of the CPC, I don't see them passing on full costs to the end users," said Philip Andrews-Speed, a principal senior fellow at the National University of Singapore's Energy Studies Institute.

The government has stressed its concern for the impact of price hikes on small and medium-sized enterprises (SMEs) with assurances that it will take unspecified measures to support individual businesses.

On June 1, Wang Jiangping, vice minister of industry and information technology, said the government would "step up price monitoring," suggesting that further scrutiny would discourage increases.

Last month, an official of the People's Bank of China (PBOC) told a press conference that the central bank had supported a 32.5-percent increase in "inclusive" loans for micro and small enterprises as of the end of April, the official Xinhua news agency reported.

In recent weeks, the PBOC also appeared to be sending mixed signals on whether exchange rates could be used to ease the effects of higher commodity costs.

On May 21, Bloomberg reported that a PBOC official had urged appreciation of the yuan to mitigate rising prices of commodity imports.

"As an important consumer of commodities globally, China is inevitably impacted by international market prices through imports," said Lyu Jinzhong, director research and statistics at the central bank's Shanghai branch, in the PBOC magazine China Finance.

But on May 27, the PBOC released a statement denying that it would move the value of the yuan renminbi (RMB) either way to benefit importers or exporters.

"Exchange rates cannot be used as a tool to spur exports, nor should they be leveraged to offset price hikes for bulk commodities," the official Xinhua news agency quoted the bank as saying.

On May 30, a former PBOC official called the recent rise of the yuan "unsustainable" and unsuitable as a destination for speculative inflows of "hot money."

China "should prevent a large inflow of short-term capital, which will push up the RMB exchange rate, weaken the competitiveness of export enterprises and disrupt the independent implementation of China's financial market and monetary policy," Sheng Songcheng, former PBOC director of surveys and statistics told Xinhua.

The bank's statements appear to be aimed at assuring that China will not be subject to charges of currency manipulation for favoring exchange rate policies to protect its economy against high commodity costs.

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