China issues inflation warning as rising commodity, consumer prices threaten economic recovery
- China’s Financial Stability and Development Commission, which is headed by Vice-Premier Liu He, released a rare one line statement on Thursday warning about the potential rise of commodity prices and consumer inflation
- Inflation is now a global concern as major central banks, including the US Federal Reserve, have injected massive liquidity to help coronavirus-hit economies
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.
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,” 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.
“[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.”
“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.
“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,” 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.