With producer price inflation at its highest level since the mid-1990s, China can’t ease monetary policy. Commodity price inflation is driving China’s PPI, and consumer prices will have to follow—unless input prices fall.
Some analysts thought the People’s Bank of China (PBOC) would respond to the third quarter’s low growth rate of 4.9% by loosening monetary policy. In background briefings, Chinese officials say that this simply won’t happen.
Monetary policy isn’t the appropriate tool for China’s slowing growth and rising inflation issues. The solution, rather, is structural. As the chart below shows, the culprit is raw materials prices. They are driven by the monetary policies of Western governments, not China.
By chastening the property sector, the Chinese government popped a bubble in construction-related commodities as well, and deliberately so. The price of iron ore in China has fallen from RMB 1,400 (US$218.87) a ton in June to less than RMB 600 today.
The price of Portland cement, though, remains about 50% higher than its January-July level, due to production constraints stemming from China’s power shortage. These should ease during the next several weeks as China’s electricity supply normalizes.
Emergency measures to increase coal supply prompted a collapse in the price of the fuel in China as well as Australia. Beijing’s over-eager environmental policy—designed to curry favor with a carbon-obsessed Biden administration—led the country’s coal miners to err on the side of production cuts, leaving China with a shortage of thermal coal in September.
China’s diplomatic tiff with Australia, which led to Beijing’s ban on Australian coal imports, exacerbated the problem. As the price of coal soared in late September, Beijing ordered miners to produce as much coal as they could and quietly unloaded Australian coal.
The State Grid Corporation of China announced on October 31 that power shortages had diminished and that the network had adequate coal supplies. That’s good news for Chinese industrial production.
Still, State Grid warned, “With the compounded challenges of high power consumption, the demand for winter heating in the north and a shortage of water for hydropower production, the grid is faced with a tight overall balance and regional shortages this winter and next spring.”
What is China importing from Taiwan?
Analysts focused their attention last week on China’s impressive export growth – 27% year-on-year as of October. Aspects of China’s import situation, though, are worth a second look.
China now imports 25% more from Taiwan than it does from the US.
We have the impression that China’s remarkable export performance in the US and European markets involved an increasing degree of intra-Asian integration.
It’s no surprise that China wants to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): Asian economic integration is already a fact, and China’s accession to the the trade pact would formalize what is already happening on the ground.