China warned of excessive market intervention as commodity prices start to fall
- Commodity prices have started to decline from record highs after Beijing took steps to shore up domestic supply and tighten scrutiny of the market
- But Gao Shanwen, chief economist at Essence Securities, says the government should check its interventionist impulse as ‘fluctuation is part of the market’
Prices for major industrial commodities have begun to fall from their recent historic highs thanks in part to Beijing’s intervention to boost domestic supply and curb speculation.
At a recent event organised by the China Finance 40 Forum, a Beijing-based group of financial officials and professionals, academic member Gao Shanwen said authorities should rein in their impulse to intervene in the market and set informal price caps.
“If the government takes immediate action against price increases by capping prices or subsidising enterprises, it would affect the normal adjustment of the market,” said Gao, who is also chief economist at Essence Securities.
The comments were made in a closed-door seminar last week and published on the forum’s social media account on Wednesday.
Unless there is an expectation that inflation will deteriorate, the government should allow price fluctuations, facilitate the entry and exit of labourers and companies in the market, and ensure banks work under commercial rules rather than government mandates, he argued.
“Currently, prices of commodities like crude steel, glass, potatoes and rice are decided by the market. Their fluctuation is part of the market mechanism. Why should we worry about and pay extra attention to their price changes?”
The comments come amid attempts by some officials to slash steel output and coal consumption, as well as talk with major market players about pricing decisions, despite the widespread view the sharp rise in raw material prices recently will have little impact on consumer prices or disrupt the central bank’s monetary policy.
Chinese domestic commodity prices increased gradually since May last year as the economy began to recover from the effects of the coronavirus pandemic.
Prices for iron ore – the key ingredient in steelmaking – peaked two weeks ago after Beijing began intervening, with other commodity prices easing in the past week, though they remain relatively high in historic terms.
In a pricing reform circular earlier this month, the National Development and Reform Commission (NDRC) said that by 2025 the costs of goods and services in competitive sectors will be mainly decided by market forces. But it added the government will nevertheless continue to make “timely macro-control suggestions” in terms of stockpiling, trade, fiscal, tax and financial measures to counter abnormal commodities price changes.
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They asked the firms, most of whom were state-owned, to take the lead in maintaining “orderly prices” for commodities and be aware of the bigger economic picture.
Gao, who argued recent price spikes were temporary, warned that inappropriate price intervention could distort the market.
He gave the example of forced production cuts in some heavily-polluting industries, which had restricted overall supplies and fuelled price rises.
In mid-March, the northeastern city of Tangshan, which produced about 13 per cent of China’s steel products last year, ordered some local mills to slash output by half before the end of June and by a further 30 per cent in the second half of the year.
Following the official brow beating on Sunday, the China Iron & Steel Association, which represents most national steel mills, issued a letter of self-discipline on Wednesday, calling on members to fight abnormal trading and malicious speculation.
As raw material prices surged early this month, policymakers went on high alert because China is the biggest consumer of most industrial commodities, including iron ore, copper and crude oil.
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Morgan Stanley economists forecast China’s inflation to remain benign, with the producer price index – the prices factory owners charge their customers – softening to 4 per cent in the second half of the year from a potential high of around 8 per cent in May or June.
The investment bank said more government intervention was possible, and policymakers may further fine-tune the pace of carbon-related production curbs on metals if the price surge continues.
However, “whether these measures could temper prices meaningfully remains unclear, given that a large part of the commodity price surge is due to global factors,” Morgan Stanley said.
