By Michael Lelyveld
The Chinese government has suffered a setback in its campaign against inflation as consumer prices accelerated last month despite pressure on producers to keep commodity prices low.
On June 9, the National Bureau of Statistics (NBS) announced that the Consumer Price Index (CPI) for May rose 1.3% from the previous year, accelerating from the pace 0.9% of the previous month.
The increase was a sign that the government was only partially successful in preventing soaring commodity prices from spreading from production to the consumer market.
While consumer price growth remained relatively subdued, the producer price index (PPI) climbed 9 percent in May after climbing 6.8 percent in April.
May’s mark was the largest monthly increase in ex-factory prices since September 2008, reflecting higher costs for raw materials, including petroleum, iron ore, copper and coal, the NBS reported.
The bureau sought to downplay the increase in the PPI, arguing that a third of May’s rise was due to a “carryover effect” from April’s results, so that only 6 percentage points of May’s figure was in fact “new”.
But the month-over-month gain in the PPI more than doubled in May from April to 1.6%, suggesting continued pressure from commodity costs.
The CPI reading continued to benefit from lower pork prices, although overall food prices rose 0.3% after falling 0.7% in April.
Falling pork prices prevented an even larger increase in the CPI. Weak demand and fears of African swine fever have combined to lower pork prices by more than 50% since January, the South China Morning Post said. From late May to early June, pork prices fell 11.2%, the NBS said.
The growing gap between the PPI and CPI figures appears to reflect government pressure on producers to absorb higher costs.
The National Development and Reform Commission (NDRC), the main planning agency, has called for improving the government’s “price control mechanism” to limit the impact on consumers of rising prices for essential goods. .
On Thursday, the NDRC announced that it would release copper, aluminum and zinc reserves from state reserves to “ensure stable prices” for non-ferrous metals.
While price controls can limit short-term CPI increases, they are likely to erode producer profits, paving the way for shortages, further price pressures, and slower growth. economic.
Ten days earlier, the SNB recorded a slight drop in the official purchasing managers index (PMI) for the manufacturing sector in May to 51, down from 51.1 in April. A mark above 50 indicates economic expansion while readings below 50 signal contraction.
In March, the PMI for the manufacturing sector was 51.9 stronger, the highest level since the start of the year.
Economic indicators released this week showed signs of slowing growth.
Industrial production in May rose 8.8% from the previous year, down for the third consecutive month. Reuters reported. Retail sales rose 12.4%, missing the consensus forecast of analysts, CNBC reported.
Inflationary pressures could pose a challenge to China’s full economic recovery this year. The International Monetary Fund has forecast growth of 8.4% while the government has set a more cautious target of “over 6%”.
“While Chinese factories gained a larger share of global exports last year, economists say they are struggling to keep up with soaring raw material costs. These have reduced profit margins, forcing some manufacturers to raise prices and others to temporarily halt production, ”the Wall Street Journal reported on May 26.
China said rising prices abroad were the source of its problems.
Last week, the US Department of Labor reported that the US CPI also rose 5 percent in May from the previous year. But the reactions of US regulators differed from those in China, where the government threatened to intervene in the market with various forms of price controls.
U.S. officials have expressed confidence in market forces and the country’s recovery from the COVID crisis.
“Today’s inflation data is the latest indicator that things are both going in the right direction and that we are having hiccups in the supply chain,” 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 benchmark interest rates near zero unchanged, but signaled that plans for the hike could be postponed from 2024 to 2023 to control inflation driven by recovery.
In contrast, Premier Li Keqiang took a strong stand against price hikes last month following State Council executive meetings at cabinet level as the government threatened a crackdown.
On May 19, a government statement pressured commodity traders and industrial consumers with stiff penalties if prices continued to rise.
“The regulation of the futures and spot markets will be better coordinated and targeted measures will be taken where necessary to filter out abnormal transactions and malicious speculation. Irregularities such as entering into monopoly deals, spreading false information, price gouging and hoarding will be dealt with with all the rigor of the law and brought to light, ”the official China Daily said.
On June 4, Bloomberg News reported that Chinese authorities “have unleashed an almost constant barrage of rhetorical and administrative measures to curb the surge in commodities.”
“Officials have raised transaction fees, changed tax rules, censored industry research, urged producers to sell inventory, coaxed trading companies to cut bullish bets, vowed to crack down on ‘malicious’ speculators and more, ”Bloomberg said.
Some analysts have played down the impact of higher prices on the economy, predicting the spikes will be short-lived.
Morgan Stanley economists estimated the PPI would peak at around 8% in May or June, but drop to 4% in the second half of the year, the Morning Post reported on May 27. According to the NBS report, the peak estimate of PPI has already been exceeded.
Although producer price growth may decline, it is unclear how successful the government will be in preventing pressures from being passed on to consumer prices.
In the power sector, analysts will watch how the government reacts to a rise in coal prices after China’s Taiyuan Coal Transaction Price Index rose nearly 14% in May.
Bloomberg reported last week that the government had considered imposing a cap on the prices that coal mines would be allowed to charge.
The government has also sent inspectors to major coal ports to “crack down on illegal hoarding,” Reuters reported.
Over the past three years, the government has reduced electricity tariffs for businesses to increase profits and economic growth, forcing generation companies and the state grid to absorb costs.
The government could face similar forces when deciding how to pay for the higher-priced coal during the peak period of electricity demand this summer. Five provinces have issued warnings about potential shortages, Platts Commodity News said.
Hong Kong manufacturers have experienced “multi-region blackouts” with peak demand at all-time highs for three weeks, the Morning Post reported on June 3.
“This has resulted in electricity rationing for two days a week in some areas, forcing owners to run factories on weekends or resort to diesel generators to keep production going,” the newspaper said.
The squeeze in coal prices comes at a sensitive time as the country celebrates the centenary of the Chinese Communist Party (CCP) on July 1.
“With the CPC’s looming 100th anniversary celebration, I don’t see them passing the full costs on to end users,” said Philip Andrews-Speed, senior researcher at the Institute for Energy Studies. National University of Singapore.
The government has underlined its concern over the impact of price increases 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, a People’s Bank of China (PBOC) official told a press conference that the central bank had backed a 32.5% increase in “inclusive” loans for micro and small businesses to the at the end of April, according to the official statement from Xinhua. the agency reported.
In recent weeks, the PBOC has also appeared to send mixed signals as to whether exchange rates could be used to mitigate the effects of rising commodity costs.
On May 21, Bloomberg reported that a PBOC official called for an appreciation of the yuan to dampen the rise in the prices of raw material imports.
“As a major consumer of raw materials globally, China is inevitably affected by international market prices via imports,” said Lyu Jinzhong, director of research and statistics at the Shanghai branch of the central bank, in PBOC China Finance magazine.
But on May 27, the PBOC issued a statement denying that it would change the value of the renminbi yuan (RMB) one way or the other for the benefit of importers or exporters.
“Exchange rates cannot be used as a tool to boost exports, nor to offset price increases for bulk commodities,” the bank said according to the state-run Xinhua News Agency.
On May 30, a former PBOC official called the yuan’s recent rise “unsustainable” and inappropriate as a destination for speculative inflows of “hot money.”
China “should prevent a large inflow of short-term capital, which would 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 director of investigations of the PBOC. and statistics said Xinhua.
The bank’s statements appear to be aimed at ensuring that China will not face charges of currency manipulation for promoting exchange rate policies to protect its economy from high commodity costs.