Potential risks and disruptions to China’s continued economic recovery have been highlighted in a rare one line statement from leading financial officials, who warned about the potential rise of commodity prices and consumer inflation. Data released on Friday showed that prices that Chinese factories charge wholesalers for their products rose the most in almost three years in March, while consumer inflation also rose for the first time in three months. The monthly release, though, had been pre-empted by a statement on Thursday from China’s Financial Stability and Development Commission, which is headed by Vice-Premier Liu He, President Xi Jinping’s top economic advisory. Analysts said the statement indicated rising worries among policymakers but did not indicate a turnaround of its supportive policy stance. “We must keep the basic stability of prices and pay particular attention to the trend of commodities prices,” said the commission in what was part of a 1,000-word statement. However, it also prioritised employment as “the largest livelihood issue”. The primary target of macroeconomic policies is to protect jobs and market entities Financial Stability and Development Commission “The primary target of macroeconomic policies is to protect jobs and market entities,” it said. “We must pay attention to ‘adding water to farm fish’, providing relief for corporations and better invigorating market entities.” The “two unshakeable goals” of supporting the healthy development of both private businesses and small and medium-sized enterprises was also reiterated. In March, China’s producer price index (PPI), which reflects the prices that factories charge wholesalers for their products, rose to 4.4 per cent from a year earlier, up from the gain of 1.7 per cent in February, the National Bureau of Statistics (NBS) said. The increase to the highest level since July 2018 was above expectations, with a Bloomberg survey of analysts predicting a rise to 3.6 per cent. China’s official consumer price index (CPI), meanwhile, rose to plus 0.4 per cent in March from a year earlier, from minus 0.2 per cent in February. This was also above the Bloomberg survey median, which had predicted a rose to plus 0.3 per cent, and represented the first rise in three months, although this was still well within the target of around 3 per cent per cent for this year. “[The statement] reminds us that the central bank’s loosening approach [to fiscal and monetary policy] will depend on employment, while tightening will rely on inflation,” said Li Chao, chief economist at Zheshang Securities. “[However,] the transmission from PPI to consumer price index will be limited given the lack of demand-side stimulus.” Li believes that consumer inflation will peak at 2.5 per cent this year, while full-year growth will only be 1.4 per cent. Last year, against a target of around 3.5 per cent, China’s inflation rose 2.5 per cent. “Inflation won’t be a core parameter for decision-making for this year and it will be hard to trigger an interest rate hike,” Li added. Inflation is now a global concern as major central banks, including the US Federal Reserve, have injected massive amounts of liquidity into the global financial system to help coronavirus-hit economies. But unlike its inflation-targeting Western counterparts, the People’s Bank of China (PBOC) has multiple policy objectives, such as supporting the economic recovery, ensuring financial stability, opening-up domestic financial markets and providing funding support for small businesses. “The producer price index could reach 7 per cent in May thanks to the low comparison base and global recovery. But it will come down in the second half,” said Larry Hu, chief China economist at Macquarie Capital. “The price risks are controllable.” Capital Economics estimates that consumer price inflation could rise to around 2 per cent by the end of the second quarter, while higher producer prices and a tightening labour market will start to put greater pressure on core inflation. That shouldn’t alarm the PBOC, but will provide reassurance that they are right to focus on controlling credit risks Julian Evans-Pritchard “That shouldn’t alarm the PBOC, but will provide reassurance that they are right to focus on controlling credit risks,” said Capital Economics’ senior China economist Julian Evans-Pritchard. Wen Bin, chief macro analyst with China Minsheng Bank, believes China’s consumer inflation risks remain moderate. “[However,] the authorities need to make preparations for external shocks, including imported inflation and a possible policy adjustment by the [US Federal Reserve],” he said.