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. |