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China may release state reserves or limit exports of commodities to tame prices and ensure domestic supplies but could hold off on monetary action unless there is evidence that higher upstream costs are feeding through to a wide range of consumer goods, policy advisors and market analysts told MNI.
A recent working paper from the People's Bank of China reaffirmed the official view that the risk of imported inflation is manageable and that the rise in PPI, fueled by global commodity prices, is temporary. However, the paper urged close attention to the differentiated impact of price hikes on various industries, suggesting that any immediate action could be targeted to address the supply side.
Wang Jun, academic committee member at the China Center for International Economic Exchanges, thinks the Politburo's end-April call to "ensure the supply of commodities important for livelihoods and to stabilise prices" indicates a focus on items such as crude oil and copper, which have a direct bearing on the cost of consumer goods. The government may release reserves, increase production, or limit exports of these items, he said.
Latest data suggest that rising PPI has started to feed through to some durable goods, including refrigerators, laptops, and bicycles. While CPI remained modest at 0.9% in April due to declining pork prices, PPI unexpectedly soared to an over three-year high of 6.8% y/y from the previous 4.4% amid record prices for iron ore, steel and non-ferrous metals.
China removed the export tax rebate for some steel products from May 1 in a bid to shore up domestic supplies.
Zhu He, researcher at China Finance 40 Forum believes the government may release reserves of some agricultural commodities. Corn and soybean prices soared to multi-year highs in April as domestic demand for feed grain for pigs swelled with the recovery from the African swine fever.
Speculation in futures is also rippling into the spot market and causing volatility, advisors said. According to Jia Na, an analyst at Today Think Tank, a Shanxi-based coal advisory firm, coal price surges are starting to disrupt companies' procurement plans and could affect electricity demand from households. Major coal industry associations recently suspended the issue of key price indexes while futures exchanges increased trading fees earlier this week.
DEMAND TO SOFTEN
Wang believes PPI will recede in the second half as the comparison base rebounds and domestic demand softens with slowing economic growth. The government will also continue to keep a tight grip on the real estate sector, a major consumer of upstream products, he added.
Zhu said robust external demand for steel may not continue into the second half as overseas production capacity recovers amid the vaccination rollout. Both Wang and Zhu expect PPI to grow around 5% for the full year.
Zhang Yu, chief analyst at Huachuang Securities, forecasts PPI will hit 7% y/y in May before falling slightly in Q3. The month-on-month PPI may keep growing until third-quarter end and start to fall in Q4 along with commodity prices, he said.