How China is helping dampen global inflation

The Chinese economy is far from overheating. So it’s not really one of the main demand drivers driving up commodity and consumer goods prices around the world, economists say.

And while some Chinese factories have passed the price increases on to Western buyers this year, many are also absorbing the higher costs of raw materials like copper and iron ore themselves.

This has kept the prices of consumer goods from rising even further elsewhere, although it has also resulted in lower profits for some Chinese factory owners.

“The experience of the pandemic suggests that China still plays an important role in preventing world prices from rising much more,” said Hui Shan, chief economist for China at Goldman Sachs.

China’s role in driving world prices has always been complex. Its emergence over the past few decades as factories around the world have drawn millions of low-cost workers into the labor pool and helped make consumer products like jeans and sofas cheaper for everything. the world.

But there were also times when China’s growth ended up exporting inflation to other countries, mainly because of rising commodity prices.

In the early 2000s, Chinese energy demand pushed up oil prices. After the 2008 global financial crisis, Beijing unleashed hundreds of billions of dollars in stimulus to build bridges and apartments, pushing up metal prices.

During the pandemic, however, Chinese leaders refrained from excessive infrastructure spending because they wanted to avoid increasing debt and risking asset bubbles in areas such as housing.

The Chinese authorities have slowed down the flow of new bank loans to the real estate sector and have decided to curb speculation on commodities, somewhat reducing the country’s appetite for metals.

“China’s role as a [end] the commodity consumer has been much smaller this time around, ”said Michelle Lam, Greater China economist at Société Générale.

According to Ms Lam and other economists, one of the main drivers of inflation has been the massive fiscal stimulus spending in Western economies, which has helped fuel a housing boom and an increased appetite for consumer goods, propelling the prices of many commodities to multi-year highs.

While China’s producer price index peaked nearly 13 years in May before declining slightly in June, it was heavily skewed by rising import prices for oil and gas. other commodities over which China has little control. This had little impact on the country’s consumer inflation, which remained well below the official target of around 3% by year-end.

“China is a price taker this time around, and has actually imported inflation,” said Larry Hu, chief economist for China at Macquarie Group.

Xu Jinwei, founder of Yangjiang Hopefine Hardware Factory in southern Guangdong province, said the prices of raw materials such as rubber have increased by about 20% this year. But the company, which makes outdoor tools and bottle openers, has increased its export prices by around 8% so far and does not anticipate any further increases as it could risk losing money. orders.

“In our industry, the competition is very cruel,” said Mr. Xu.

The willingness of factory owners to pass the higher costs on to Western buyers is also constrained by the prospect that Western demand may decline this year as consumers shift from purchasing products to spending more on meals and travel.

Economists are debating how long China can help ease global inflationary pressures. As the Chinese economy matures, its ability to continue to call on cheap workers declines. Labor costs have been steadily rising, and China is now grappling with a shrinking pool of young workers willing to work long hours in factories.

Some economists note that over time, China’s latest campaign to cut greenhouse gas emissions will reduce its domestic production of metals, especially steel and aluminum, which could increase upward pressure. on world prices.

Yet China is unlikely to become a major driver of inflation anytime soon, economists say.

While the prices of imports from China to the United States rose 2.7% in the 12 months ending in May, it was less than the overall 5% increase in inflation at the US consumption over the same period. Prices for goods shipped from Mexico and the European Union rose faster, 4.8% and 6.5% respectively, according to data from the United States Bureau of Labor Statistics.

If anything, economists say, global businesses might want to rely even more on China if they are to keep inflation under control.

“Relocating” or moving more supply chains out of China due to rising geopolitical tensions could lead to higher inflation if work moves to less profitable places, said Ms. Shan of Goldman Sachs. Other sources of low-cost manufactured goods like Vietnam and India are still struggling to contain the pandemic and maintain full production capacity.

“It’s a really dynamic situation that deserves to be watched closely,” she said.

Write to Stella Yifan Xie at [email protected]