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MNI: Surge In China Factory Prices Needs PBOC Credit Expansion

SINGAPORE (MNI)

A "scissors differential" between producer and consumer prices needs the PBOC to further expand credit.

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China's central bank is likely to push for expanded credit support to manufacturers hit by high input costs as a surge in producer prices reinforces the need to relieve pressure on the economy and employment, policy advisors told MNI.

Rising global commodity prices for energy and metal commodities are expected for the rest of 2021, which will push up costs for downstream manufacturers, said Xu Hongcai, deputy director of the Economic Policy Commission of the China Association of Policy Science.

In the near-term that may dent economic performance in the crucial manufacturing sector when coupled with power shortages in some areas of the country as utilities struggle to pass along higher fuel costs. see: MNI: China To Keep Liquidity Easy As Q4 Economy May Slow To 5%.

According to National Bureau of Statistics, China Q3 GDP printed a 4.9% year-on-year increase, a record-low level in the same period except last Q3, also 4.9%, when the country was still dealing with pandemic lockdowns.

MIND THE GAP

The People's Bank of China is keenly aware of the striking gap between producer and consumer inflation reported last week that saw September PPI jump 10.7

% y/y, the highest in 26 years, while consumer price remained soft at 0.7%.

Sun Guofeng, head of the PBOC monetary policy, said in a briefing last Friday that PPI will at high level in coming months while CPI will edge up but within the 3% targeted range. "In the process, some downstream small and medium-size companies will be impacted…the central bank will remain the liquidity ample via various of policy tools," he noted.

Xu said this huge "scissors differential" however would not deter a cut in the reserve requirement ratio in Q4, and in fact prompt policies to expand coal supplies to the power sector.

The PBOC tends to focus more on economic growth and employment since inflation is controllable, Xu noted.

SHIFTING POLICY

Monetary policy has shifted to flexibility and easing from tighter conditions that started in May last year as the economy quickly rebounded from pandemic lockdowns, even though the pace and scale are moderate, said Li Gang, senior fellow at the National Institution for Finance and Development.

A widely expected economic slowdown in Q4 and into next year is largely driven by high manufacturing production costs that squeeze profits at small firms, putting jobs at stake too, he concerned. Li predicts PPI would remain at double digital levels for the rest of the year and may even touch 11% next month.

But he added that near-term commodity input price swings normally do not cause a big impact on policymaking, even though the gap between CPI and PPI is expected to widen.

Controls on credit are more relaxed now but it will take time to flow through to key sectors since regulations on property market and local government funding vehicles are ongoing, Li said.

WEAK CREDIT DEMAND

The advisors said that while the PBOC needs to provide credit support to manufacturers, borrowing demand is weak particularly with the drivers of local government debt and property partially sidelined.

Xu said that could blunt the effectiveness of an RRR cut. In addition, banks are looking for fresh recapitalization sources, which will hinder a credit expansion.

According to the PBOC, outstanding total social finance was up 10% in September, compared with 10.3% in August, and yuan loans added CNY1.66 trillion. That is below expectations, and CNY232.7 billion less than in August.

ENERGY SHORTAGES

China faces higher costs for imported coal, gas and oil on rising global prices amid robust demand from factories and power producers.

According to Chinese data service provider Wind, the price of steam coal jumped by 60% in September and is around CNY1500 per tonne now.

Compounding the demand situation is domestic energy production not completely recovered from pandemic lockdowns and new investment lags due to initial gloomy expectations for energy demand recovery, according to Han Wenke, former head of Energy Research Institute of National Development and Reform Commission.

But China has taken steps to prioritise coal production and raised the tariffs allowed on some electricity prices for the industrial sector so that power generators could cover higher input costs. But Han added that the energy situation would remain tense into the winter through next year.

Xu added that a mix of policies that aim to cut energy use to curb air pollution and carbon emissions and a reduction in coal imports from Australia made the situation worse.

Output of raw coal growth was flat to negative from March to July in China, according to Hongta Securities and coal imports were lower than the same period in the past three years.