News

After a period of rising inflation and the highest PPI since the collapse of Lehman, China launches price controls.

  • 09 June, 2021
  • 12:39 pm EEST

China effectively started price controls, moments after posting the Red hot PPI since Lehman, with China’s economic planning agency committing to raise supply of important consumer items to stabilize prices, according to a statement on the NDRC website on a national video meeting Tuesday.

The National Development and Reform Commission jointly issued and implemented, with the Ministries of Finance, Agriculture and Rural Affairs, and Commerce, as well as the State Administration of Market Supervision, Food and Reserves Bureau, and other six agencies. The National Development and Reform Commission hosted  an national video conference on June 8 in order to perform a good job of implementation…

The summit emphasized the need of price regulation of vital livelihood goods to the Party Central Committee and the State Council. The price management mechanism for vital livelihood commodities has been consistently enhanced in recent years, yielding impressive results in the work of ensuring supply and stabilizing prices.

However, there is a long line, many connections, and a wide range of coverage in the production, supply, storage, and sales of vital livelihood commodities. “Small production and a vast market” are significant qualities. Prices are prone to rising and falling in the face of natural disasters, market risks, and emergencies.

It is critical to accelerate the progress of important livelihood commodity price control mechanisms, to optimize the capacity to keep supply and stabilize prices, to effectively resolve the impact of livelihood commodity supply and price fluctuations on people’s lives, and to positively affect people’s sense of gain, happiness, and security.

Production, distribution, consumption, and other interconnections are given full play, and economic, legal, administrative, and other mechanisms can be used to increase the ability and level of price control, and effectively guarantee the effective supply of vital livelihood commodities and overall price stability.

The meeting also looked at the current and future price situation, made detailed plans for this year’s work to ensure the supply and price stability of important livelihood commodities, as well as the improvement of price control mechanisms, and focused on key commodities like corn, wheat, edible oil, pork, and vegetables.

Expect illicit markets for everything the government micromanages to arise, leading to shortages that will make the current batch of supply-chain bottlenecks look like a walk in the park now that China has officially fixed pricing.

The potentially “shocking” China inflation data, Beijing just announced that while CPI came in slightly lower than expected at 1.3 percent Y/Y, well below the 1.6 percent consensus, PPI – or factory-gate inflation – came in at a blistering 9.0 percent due to rising commodity prices.That figure was higher than the average projection of 8.5 percent, and it was the largest since September 2008, shortly before Lehman Brothers went bankrupt. The difference between the CPI and PPI growth rates, which Gundlach mentioned earlier today in his Doubleline call, has now reached its largest level since 1993.

On the CPI scene, the number came in lower than expected, thanks to a tame core component that rose just 0.90%, while the food inflation tracker rose a modest 1.65%, a far cry from the soaring, double-digit food inflation seen a year ago, when sky-high pork prices blew the food basket to bits. And since the CPI has remained stagnant, it is apparent that Chinese factories are still absorbing increased expenses rather than passing them on, implying that industrial earnings may soon fall.

There is no crisis in China’s view as long as the CPI remains low. As previously stated, the prevailing view is that such sharp increases in producer prices are a short-term phenomenon caused by the restarting of economies and supply constraints, despite the fact that an increasing number of analysts are issuing loud warnings that higher prices may become more sustained.

The fear that the PBOC will have to interfere eventually to curb imported inflation by tightening conditions more (and/or raising rates) has devastated local markets, sending the Hang Seng China Enterprises Index down for the fifth day in a row, the longest losing streak since September.

While we don’t expect the PBOC to act any time soon, the key question is how can Chinese companies pretend everything is fine before a surge in commodity prices that isn’t passed on to consumers (thanks to Beijing’s repeated taps on the shoulder) sends profit margins plummeting and sparks yet another Chinese crash.

According to a Bloomberg survey of economists, China’s producer-price index climbed to 8.5 percent in May, the highest level since the fall of Lehman Brothers in September 2008.

Right now, economists are optimistic about the dangers. Rather than passing on increased expenses, Chinese factories continue to absorb them. As a result, the consumer price index is likely to have only risen by 1.6%, according to the study.

That’s good news for a central bank that, according to ANZ Banking, doesn’t have the instruments it needs to deal with supply-side price pressures. Globally, the consensus is that such significant increases in producer prices are a short-term phenomenon caused by the restarting of economies and supply restrictions, while there are growing concerns that higher prices will become more permanent.

As a result of pandemic-era stimulation, Beijing is battling with multiple fronts at once. Much of the money injected into the global economy finds its way into China, complicating Beijing’s efforts to keep prices under control without abandoning market reforms. When it comes to combating overheating in the yuan, crypto, housing, and raw resources, this has resulted in a delicate balance of deploying strong rhetoric and market expectation management rather than harsh intervention.

  • The nation’s financial markets are becoming more cautious. The Hang Seng China Enterprises Index has been on a five-day losing streak, the longest since September. Along with the CSI 300 Index of mainland-listed companies, the gauge was among the worst performing global benchmarks in June.
  • China’s currency has also turned bearish after a big advance prompted the People’s Bank of China (PBOC) to intervene to limit advances. This month, the offshore yuan has lost 0.5%, the most in Asia. The government bond market is also losing altitude, with the 10-year note yield rising to its highest level in six months on Friday.

 

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