MNI EXCLUSIVE: China Seen Countering PPI Rise Via Output Boost

China will monitor the impact of factory gate inflation on consumer prices before resorting to monetary policy action but as an interim measure it may ask some commodity companies to raise output, advisors and market analysts told MNI.

It is feasible to ask coal or steel producers to increase production in the short-term though that may not be enough to cool upstream costs given China's heavy reliance on imported raw materials, said Su Jian, director of the National Center for Economic Research at Peking University.

"It is cost-driven inflation, so it should be addressed via the supply side," he said, adding that there is no need for an immediate monetary policy response.

According to Jia Na, an analyst at Today Think Tank, a Shanxi-based coal advisory firm, the National Development and Reform Commission is considering a gradual increase in production capacity and has already met major coal producers several times. Jia expects some state-owned mines with stringent safety measures may be selected to increase output first and that prices will gradually adjust downward.

The NDRC declined to say whether it was considering such a step.

DEMAND TO WEAKEN

Imported inflation has gained policy focus with top leaders highlighting the need to check raw material costs and help companies. However, at a briefing on Monday, a spokeswoman played down the recent rise in commodity prices and said there is no fundamental change to supply and demand.

PPI jumped unexpectedly to a near three-year high of 4.4% y/y in March from February's 1.7% while CPI reversed from negative territory to 0.2% y/y with higher fuel costs as one of the main drivers.

Wang Jun, academic committee member at the China Center for International Economic Exchanges, sees the increase in upstream prices as temporary. Demand will weaken as growth slows after peaking in Q1 due to the low base effect, he said.

Both Su and Wang believe the spike in PPI won't feed through to retail prices, given the overcapacity in consumer goods and soft demand.

PPI may break 5% or even 6% in Q2 before receding to an average 2.5-3% for 2021, while CPI may end around 1.5% for the year, Wang said. He added that inflation won't be a major concern and there is no need for extreme measures such as a hike in interest rates.

High steel prices may last into Q3, said Wu Wenzhang, founder and board chairman of SteelHome, a Shanghai-based steel advisory firm. He believes it is hard to increase steel supply as environmentally-compliant steel producers are at full capacity and the authorities are unlikely to dilute air quality requirements. But demand for steel may slow as infrastructure investment and exports weaken in the second half of the year, he said.