China Claims Progress in Anti-Inflation Campaign

Price control tactics raise policy concerns.
An analysis by Michael Lelyveld
2021-07-23
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China Claims Progress in Anti-Inflation Campaign In a file photo Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China.
Reuters

China has claimed an early victory in its battle against inflation, but the government's tactics and economic policies have left the outcome in doubt.

On July 9, the National Bureau of Statistics (NBS) reported that the producer price index (PPI) for June rose 8.8 percent from a year earlier, dropping back slightly from a 12-year high of 9 percent in May.

As factory gate prices decelerated, the year-to-year growth of the consumer price index (CPI) also subsided, edging down to 1.1 percent in June from 1.3 percent a month before, the NBS said.

Officials said the numbers were a sign that inflationary pressures were under control and would not pose a threat to economic growth.

"China's economy recovered steadily in June, with ample supply in the consumer market and the stable performance of consumer prices," said NBS senior statistician Dong Lijuan, according to the official Xinhua news agency.

Some foreign media also credited the government with pushing back against the surge in commodities which has driven up prices for inputs including crude oil, natural gas, iron ore and coal this year.

"If the goal of Beijing's efforts to tame the commodities rally was to halt an escalation in manufacturing costs, the government can claim some initial success," Bloomberg News said, citing a retreat in spot prices for copper and steel coils during June.

"While the precise impact of Beijing's high-profile, multi-pronged campaign to batter down commodities prices is arguable, the implications of softer prices are becoming clear. A less frenzied commodities market and peak inflation give authorities more policy space to tackle rising pressures on the economy," Bloomberg said on July 8.

But a closer look at the economic tactics that the government brought to bear against inflation raised doubts about the real cost of marginal gains.

An examination of the economic decision-making and statistical reporting suggests that the government used a combination of crude tools and coercive policies to keep inflation from spilling over from factory gate prices into the consumer sector, resulting in only a slight pullback in price growth from the highs of May.

CPI readings continued to benefit from falling prices of pork as farmers dumped underweight hogs on the market due to fears of African swine fever outbreaks.

On June 16, China's National Food and Strategic Reserves Administration announced that it would release some of its stores of nonferrous metals to stabilize prices for the first time in over a decade.

On July 5, the authorities sold 100,000 metric tons of copper, aluminum and zinc at auction for undisclosed prices, said to be below spot market rates. The offerings were quickly snapped up, Reuters reported.

On Wednesday, the regulators announced a second auction of the metals totaling 170,000 tons would take place by the end of this month along with more efforts to stabilize prices.

The government does not publicize the size of its reserves, making it difficult to evaluate its ability to continue the releases or the longer-term effects on the markets.

Fluctuation

China's top planning agency, the National Development and Reform Commission (NDRC), said that regulators would sell metal reserves "in multiple batches as needed in light of market price changes," Xinhua reported.

On July 19, the NDRC said it would "closely monitor" price changes and futures trading to "maintain market order," and crack down on violations such as hoarding, according to the official English-language China Daily.

Days earlier, the agency said it would release more than 10 million tons of coal from state reserves for the fifth time this year to meet peak summer demand and ease shortages, Reuters reported.

Last month, the commission also issued new rules for publishers of commodity indexes in an apparent effort to discourage the reporting of price increases and inventory levels.

"According to the regulation, authorities can conduct compliance reviews and take disciplinary measures for non- compliance," the NDRC said.

The emergence of price controls follows uncertainty about the uneven pace of economic recovery from the COVID-19 crisis.

While the government has spurred industrial production, helping to drive up raw material prices, retail sales growth has remained relatively restrained.

Despite the argument that a cooling off of commodities would give the government more room to deal with pressures on the economy, the price control tactics are essentially pulling in the opposite direction from China's pro-growth campaign.

"As in the U.S., the Chinese authorities want to talk of 'transitory' price spikes and wish inflation away while pursuing aggressive stimulation," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

"My guess is that, by the first quarter of 2022, the contradictions will become too obvious to ignore," Hufbauer said.

Recovery

In recent weeks, China has unveiled a series of measures to keep economic growth on the recovery track despite sporadic outbreaks of the virus around the country and the threat of variants abroad.

In June, China's banks boosted loans by 17 percent from a year before to 2.12 trillion yuan (U.S. $327.7 billion), according to People's Bank of China (PBOC) figures.

On July 9, the PBOC announced it would cut the reserve requirement ratio (RRR) for most banks by one-half of a percentage point, adding 1 trillion yuan (U.S. $154 billion) of liquidity to the economy.

One day earlier, the PBOC said it would remove 24 billion yuan (U.S. $3.7 billion) in transaction fees to help small and micro-sized enterprises, Xinhua reported.

Taken together, the measures stop short of a major stimulus, but the effect is likely to support increased consumption and raw material demand.

While China has been battling back against commodity price hikes and inflation, it has also claimed credit for the effect on first-half trade figures, which exceeded forecasts.

Last week, China's General Administration of Customs (GAC) reported that total trade jumped 27.1 percent in the first half to 18.07 trillion yuan (U.S. $2.79 trillion).

Exports in June climbed 32.2 percent from a year earlier in dollar terms, beating a Reuters forecast of 23.1 percent. Imports climbed 36.7 percent, topping the forecast of 30 percent.

"The surprise surge in exports is probably in large part due to rising commodity prices, as commodities like iron ore soared and price pressures passed on from imports to exports," said Zhou Hao, senior economist for emerging markets at Commerzbank AG, quoted by Bloomberg.

In releasing the trade results, the GAC portrayed inflation as a product not of China's making, despite the effects of China's economic growth and demand.

"The risks of imported inflation are generally controllable in China, though the rise in international bulk commodity prices has pushed up the production costs of enterprises," the GAC said, according to Xinhua.

The positive trade numbers set the stage for China's larger release of economic growth data last week.

In announcing the 7.9-percent growth of gross domestic product in the second quarter, the NBS and state media took pains to highlight the 12.7-percent growth rate of the first half in an attempt to minimize the drop from the record first-quarter rate of 18.3 percent.

Growth rates for trade and GDP are expected to keep declining throughout the year, but the Communist Party tabloid Global Times argued that the signs of slower growth in the second half are "not (a) cause for concern."

The paper quoted a GAC official as warning of the risk of a trade slowdown for reasons beyond China's control.

"At the moment, the COVID-19 epidemic is still spreading in many places around the globe, the trend of the epidemic is complex and trade still faces many uncertain and unstable factors," the official said.

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