Intense competition, spurred by the rise of e-commerce and slow domestic demand forcing manufacturers to absorb rising input costs

Chinese consumers have been spared massive price increases, as the Asian country battles to contain surging commodity prices.

These price increases are being absorbed by manufacturers, fuelled by intense competition among smaller businesses, spurred by the rise of e-commerce and soggy domestic demand. As a result China’s manufacturers are absorbing rising input costs rather than passing them on to consumers at home.

Bloomberg is reporting that despite anecdotal reports of price increases, consumer inflation overall has been tame and looks set to remain that way. The business news outlet says economists forecast data on Wednesday will show producer prices climbing 8.4 per cent in May from a year earlier.

This would represent the fastest pace since 2008 while at the same time consumer prices rose 1.6 per cent, representing the widest gap between the two since 2017. The failure of those pressures to spread through the economy is allowing China’s Central Bank to maintain the lower interest rates it introduced after the coronavirus struck mainland China last year, while policy makers attempt targeted measures aimed at easing commodity shortages and limiting speculation.

Beijing now deploying a similar to the policy mix as in 2019

Bloomberg states that Beijing deployed a similar to the policy mix in 2019, when consumer prices began spiking due to a shortage of pork, resulting from African swine fever sweeping through China’s pig herd. However, this time around measures like releasing reserves from state stockpiles and increasing imports will have less of an impact, as the shortage of commodities is a product of a global pandemic and not limited to China.

Gao Ruidong, chief economist at China’s Everbright Securities contends that, “the possibility of cost-driven inflation triggering tightening is minimal”.

However, the Central Bank has stated that the surge in commodity prices has little impact on consumer prices and it expects factory-gate inflation to stabilise later this year.

Just as the US is going through a period of faster consumer price gains, China is experiencing its own spurt in prices at the factory gate – most likely, a transient one.

China’s currency is another factor holding back tightening. Because Beijing has a policy of keeping the exchange rate of the yuan broadly stable against a basket of currencies, it tries to control the impact of higher rates on capital inflows from yield-chasing investors. A central bank researcher recently suggested the yuan could be allowed to appreciate against the dollar to lower commodity prices for importers – a move that could hint at monetary tightening. But the bank quickly rowed back on that suggestion.

Government-linked economists have warned of the risk of interest rate increases pulling in a wave of foreign cash created by loose monetary policy in the US and Europe that could destabilise China’s financial system.