For China, excess economic stimulus not as risky as tapering stimulus too quickly, economists say

Soaring commodity prices raise questions about whether China created too much demand for raw materials by overcompensating for economic damage from pandemic
But analysts say higher prices were the direct result of surging post-pandemic demand, coupled with supply shortages of crucial commodities such as steel

China economy

Su-Lin Tanin Singapore

Published: 6:30am, 26 May 2021

Why you can trust SCMP

China’s economy is not at risk of overshooting on economic stimulus, despite the recent strong rise in commodity prices, and any attempts to aggressively taper economic support would be more detrimental than helpful, according to economists.

The domestic prices of steel, copper, coal and other raw materials – key ingredients in the infrastructure and real estate building boom that has powered China’s relatively quick recovery – shot up to record levels in recent weeks on the back of strong demand, raising questions about whether Chinese authorities overcompensated for the economic damage caused by the pandemic and created excess demand for raw materials.

The high price of steel and other raw materials has forced Chinese manufacturers, particularly smaller private-sector firms that spoke exclusively to the Post, to take the extreme step of rejecting new customer orders outright because they can no longer make a profit, despite continued strong global demand for products made in China as the rest of the world strides towards recovery.

The PBOC will step in if inflation becomes really high – say, close to double digits – but it will be mindful not to step on the brakes too soon

Raphie Hayat, Rabobank China economist

Economists have also downplayed the risk of sustained broad-based inflation, calling the recent rise in prices a short-term phenomenon caused by China’s economic recovery and the comparison with the low base of depressed prices caused by the pandemic shock a year ago.

It is also unlikely that China’s central bank, the People’s Bank of China (PBOC), will react to current conditions with a knee-jerk tightening of monetary policy, according to Rabobank China economist Raphie Hayat.

“I don’t think China will be overstimulated this year. If anything, I am worried that the central bank’s plans to curb credit growth will go too far and start a wave of defaults among China’s highly leveraged state-owned firms,” he said. “That is not our base case, but I see this as a clear risk.”

“On the inflation front, I still think the rise in inflation is short-term, rather than long-term, in nature. For one, it is a base effect – prices declined at the height of the [coronavirus] crisis in China last year, which means any move back to normal prices is high in percentage terms.”

The price inflation has, so far, been largely confined to industrial materials, including copper, coal, steel and iron ore, as well as to some agricultural commodities such as corn and wheat.

Bigger state-owned companies have been able to pass on the higher cost of raw materials to their customers, but smaller manufacturers do not have this pricing power, and so many have had to stop accepting new orders.

China’s factories decry surge in raw material prices as they cut production: 2021 may be worse than 2020

A survey this month of nearly 100 steelmakers, including leading producers such as Hebei Iron & Steel and Shandong Iron & Steel, indicated that they planned to raise steel prices by more than 10 per cent.

The price of copper recently hit a record of US$10,000 a tonne, while iron ore has been trading above US$200 a tonne – the highest in 10 years. The price of zinc also hit a three-year high two weeks ago.

Last month, China’s factory gate prices rose at the fastest rate in more than three years, raising concerns that if these price increases were passed on to consumer goods, it could put downward pressure on still-weak consumer spending.

Workers check rolls of sheet aluminium at a factory in Wuhan, Hubei province. Photo: STR/AFP

ING senior commodity strategist Wenyu Yao said these higher prices were a direct result of recovering post-pandemic demand, which has been accelerated by Chinese and US economic stimulus measures, coupled with supply shortages of these commodities.

“I don’t think China is overstimulating this year,” she said. “In fact, aggregated credit growth is slowing amid its [debt] deleveraging efforts, although monetary policy remains prudent as the PBOC has promised ‘no U-turn’ [in its economic support measures].”

Indeed, Hayat said that, with no wage rises on the horizon, the Chinese economy would not be able to support high inflation, and so he expected the current hot demand to start easing in a few months.

China’s economy set to receive ‘necessary support’ for coronavirus recovery this year, central bank says

“China’s recovery is slowing down, as we have seen in, for example, the latest retail sales data. With reduced demand pressure down the line, inflation should ease as well,” he said.

Retail sales growth slowed to 17.7 per cent in April compared with 24.9 per cent a year earlier, below expectations and well below the March growth figure of 34 per cent, Hayat noted.

That said, persistently high commodity prices would be worrisome because they have the potential to derail China’s economic recovery, Yao said.

“As officials have repeatedly warned of this risk and vowed to crack down on speculation in certain commodities markets, there is a fine line to be drawn to balance the growth target and the consequences of prices rising further,” she said.

Chinese authorities have been quick to clamp down on speculative trading in commodities in recent weeks.

Last week, the Chinese State Council said authorities were paying closer attention to the impact of high prices and were deploying a two-pronged approach to stabilise markets, increase supply and enhance supervision.

On Sunday, the National Development and Reform Commission (NDRC), the state economic planner, and four other departments laid down the law to executives of major iron ore, steel, copper, coal and aluminium companies, vowing to show “zero tolerance” for illegal activity such as price-fixing, spreading false information, hoarding and any speculative activity.

The authorities cited excessive speculation as a major reason for price rises in the domestic commodity market, although global prices have also played a part.

Beijing taps US to fill more than a third of next season’s corn imports

The NDRC said it would step up the supervision of futures and spot markets to detect abnormal trading and malicious speculation. On Tuesday, it widened its approach, saying it would also tighten controls over agricultural commodities such as corn.

On Monday, Premier Li Keqiang said the government would strive to prevent rising commodity prices from being passed on to consumers.

Chinese Premier Li Keqiang inspects the Ningbo-Zhoushan port, a major transit area for bulk commodities in China, in Ningbo city on Monday. Photo: Xinhua

The government’s tougher approach spooked futures and spot commodities markets, with prices starting to fall, commodities analysts at S&P Global Platts said on Tuesday.

Chinese steel rebar prices have been on a downward slide, dropping 4 per cent earlier this week.

Even with inflation throwing a wrench in the works, economists do not see China speeding up its very gradual tightening of monetary policy, as it seeks to ensure that the economy remains on track to hit the central government’s gross domestic product growth target for this year.

“I still think China’s economy will likely meet its ‘above 6 per cent’ growth target with relative ease, the low base of 2020 alone will go a long way in achieving that growth target,” Hayat said.

“I think inflation concerns are secondary from the central bank’s perspective. Don’t forget, the official policy objective of China’s central bank is not maintaining price stability, but rather to maintain the stability of the value of the currency, and thereby promote economic growth.

“The PBOC will step in if inflation becomes really high – say, close to double digits – but it will be mindful not to step on the brakes too soon, especially if it expects inflation to go down in a couple of months.”

Post