The Complexity of China’s Economy and Rising Prices – Analysis – Eurasia Review
By Wei Hongxu*
So far this year, the world has seen soaring inflation driven by rising energy and commodity prices in the post-pandemic environment, compounded by global monetary easing and currency distortions. the supply chain.
Inflation in the United States hit a record high of 7.5% in January. In major economies like Europe and the UK, it is above 5%, while emerging economies like Brazil have seen inflation above 10%. As a result, the Federal Reserve and Bank of England tightened monetary policy in response to high inflation. At the same time, the outbreak of the Russian-Ukrainian conflict, as well as European and American sanctions against Russia, also led to distortions in the prices of energy and certain raw materials, leading to a rise in global inflation. and economic turbulence. Meanwhile, China’s economic recovery and growth are also under increased pressure, according to ANBOUND researchers, due to changes in the international situation and the possibility of “stagflation” in the economy. world.
Inflation in China did not rise in the first two months of the year, with the persistently high PPI reflecting the burden of commodity price growth on businesses, and the low CPI reflecting the current sluggishness of domestic demand. These factors have increased pressure on business operations and profitability. Such a complex situation not only means that the country’s economy will find it difficult to maintain growth this year, but also makes it more difficult to adjust macroeconomic policies. There will be further structural adjustments and cost inflation. This requires adjustments on both the supply and demand side.
Current distortions in international energy and commodity supply and demand keep China exposed to imported inflationary pressures, according to ANBOUND researchers. With the war between Russia and Ukraine impossible to resolve in the short term, crude oil and natural gas prices have risen significantly, and refined oil prices in China have undergone multiple adjustments, affecting household consumption and increasing the cost of doing business.
The most difficult is the rise in world grain prices, which is gradually affecting the domestic market and the prices of food and related products in China. At present, the prices of wheat, corn, soybeans and other major grain varieties in the international market have increased significantly, and the same is true in the Chinese market. The price of wheat on the Zhengzhou Commodity Exchange was 2,946 RMB/ton at the beginning of the year, and the highest price reached 3,761 RMB/ton, up 27.7%, and is trading currently at 3,405 RMB/ton. The price of corn on the Dalian Commodity Exchange was 2,672 RMB/ton at the beginning of the year, and the highest price reached 2,932 RMB/ton, up 9.7%, and is trading currently at 2,885 RMB/ton. The price of No. 1 soybean was RMB5,652/ton at the beginning of the year, and the highest price reached RMB6,443/ton, up 14%, and is currently trading at RMB6,213/ton. tonne. The rise in relevant grain prices not only directly affects residents’ daily consumption, but also affects meat products and related industrial products through the rise in feed and raw material prices, thus directly affecting the CPI. Therefore, from this point of view, although China’s grain market may remain stable, the continued rise in international grain prices will jeopardize the country’s economic and social stability.
What is more worrying is the situation of companies. For example, Tesla, BYD, Weltmeister, XPeng, Nezha and many other electric vehicle (EV) companies have announced price increases since March. According to limited data, this series of price increases affected nearly 20 electric vehicle companies and about 40 types of cars. The majority of EV companies blamed the price increase on “rising raw material prices”. Market institutions have analyzed that since 2021, the prices of upstream raw materials of lithium batteries such as cobalt and lithium have risen sharply, and the production of lithium batteries is facing obvious cost pressure. As of March 18, 2022, the average price of battery-grade lithium carbonate was 515,000 RMB/ton, up 890.4% from 52,000 RMB/ton on December 31, 2020. The average price of cobalt on the Yangtze non-ferrous metals market was 571,000 RMB/ton, up 104.7% from 279,000 RMB/ton as of December 31, 2020. In reality, the high PPI in February indicated the growing pressures on costs that many industrial companies were faced with.
From a consumption perspective, the CPI remains at a low level, forming price scissors with the PPI. This indicates, on the one hand, that overall demand in the consumer sector remains weak; while it also shows that companies are facing greater pressure from excess capacity. In the automotive industry, despite the rapid growth of the electric vehicle sector, the figures for the first two months of the year were not optimistic regarding the overall consumption of passenger cars. According to data from the China Passenger Car Association, a total of 1.246 million passenger cars were sold domestically in February, a 40.0 percent drop in sales from the previous month and an increase of 4.2 % compared to the previous year. In the first two months of this year, China’s cumulative passenger vehicle sales were 3.324 million units, down 60,000 units from the same period last year. Meanwhile, consumption figures for household appliances and mobile phones were also disappointing. This means that overall consumer demand remains under pressure. In this case, rising commodity prices eat away at corporate profitability. Under the downward trend of the economic cycle, market competition will be more intense, and the pace of overall economic restructuring is accelerating. This is also why ANBOUND said the global economy is “seeking bottom” and heading for a “soft landing”.
Investment, consumption, industrial production and other macro data that beat expectations in the first two months of this year showed “signs” of economic recovery, but most of them are of a volatile in the short term, as they are mainly linked to previous basic data (measured by the two-year average growth rate), and also on the basis of increased macroeconomic support and increased public investment.
Whether this trend can continue remains to be seen. Of course, judging from the current situation of enterprises, state-owned enterprises and other large enterprises still maintain good performance due to their monopoly and competitive advantages. However, as National Bureau of Statistics officials said, the statistics only reflect the operating conditions of businesses above the scale. Large and medium-sized companies that achieve economies of scale are still resilient, while smaller companies still face great challenges. The fate of the large number of small and medium-sized enterprises is further reflected in other aspects. This change in structure at the firm level not only results in the “deviation” of macro data, but is also likely to result in the destruction of the market ecology. With regard to micro and small enterprises, if a large number of these enterprises have a “bad situation” and are transmitted more to large and medium enterprises, as well as to upstream enterprises, this can only lead to a change in the overall macroeconomic trend.
Moderate price increases would have a positive effect on stimulating economic demand. Although the global and structural impact brought by the sustained rise in the prices of energy, raw materials and other raw materials may not be reflected in the global macroeconomics, for the moment the impact on the economic form and the economic potential can be destructive. This type of spontaneous structural adjustment in the market not only increases the pressure to maintain “stable growth” in the macroeconomy, but also carries the potential risk of “stagflation” in the long term. According to ANBOUND, the “triple pressure” facing the macroeconomy, namely a contraction in demand, a shock in supply and a “weakening of expectations”, has not been alleviated but has instead increased further. increased. In terms of macro policy, adjustments need to be made on both the demand and supply side to avoid a vicious circle of simultaneous contraction on both sides.
*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK