The latest statistics show that China's national consumer price index (CPI) sees an increase of 1.3% year-on-year in May. In the same month, the CPI fell by 0.2% month-on-month. Excluding food and energy prices, the core CPI rose 0.9% year-on-year, marking an increase of 0.2 percentage points from the previous month. Meanwhile, the national producer price index (PPI) for industrial producers increased by 9.0% year-on-year and 1.6% month-on-month, while the purchasing prices for industrial producers rose 12.5% year-on-year and 1.9% month-on-month respectively. Contrary to many people’s expectations, the CPI data was lower, while the PPI had unexpectedly increased. In regard to the much discussed inflation this year, the latest data shows that the inflation may further increase the market's divergence on future inflation trends, and only time will reveal the final outcome.
ANBOUND researchers believe that the new statistics carry two significance. One, the rise in inflation is to be expected as it is a product of China's fiscal and monetary policy stimulus from the previous year; It is also a reflection of the oversupply of global currency in the country. Specifically, the high commodity prices and raw materials reflected in PPI are gradually being transmitted to final consumption, causing an increase in the CPI. Two, the degree of domestic inflation in China has not risen drastically. It is not only lower than the public’s predicted value, it even decreased. The change is confusing for many, but it accurately reflects the balance of supply and demand, signifying that China’s economic recovery is slowing down, which means there will be no large-scale rebound. As expected by central bank officials, China's economic growth has shown a trend of initial high growth followed by a period of low growth.
Many are worried that China’s slow economic recovery will widen the gap between PPI and CPI, which will plunge China into stagflation. Of course, this is only the worst-case scenarios. ANBOUND researchers reasoned that China has faced the issue of overproduction for a long time, wherein the increase in PPI is insufficient to cause the resonance of consumer prices, instead increasing competition among businesses, and improving production efficiency, some of them will be eliminated. In fact, several analyses show that the changes in the total supply and demand pattern and a series of other structural factors has been weakening the transmission of PPI to CPI since 2013. Inadequate domestic demand continues to be an obstacle to China’s economic cycle. If aggregate demand does not improve in the long-term, it may drag the potential growth rate downward through the economic cycle, leading to a passive reduction in the potential economic growth rate.
At the same time, in regard to the currency issue, one has to consider the new changes brought about by the current economic structure and technological development. The deepening of currency capitalization means that the growth of the currency transmission chain will also slow down the rate of inflation. During the post-pandemic period, China’s economic resilience means that it will not suddenly stagnate, but continue to maintain a medium-to-low growth trend in the long run, and its inflation levels too will maintain a long-term trend of moderate increases.
Owing to the COVID-19 pandemic, major economies worldwide have released unprecedented liquidity under the Federal Reserve’s monetary easing policy. Although the current capital markets and research institutions are aware of the inflation risks brought about by the approach, it also affects the overall future trend in a largely different manner. At which point the concern will be the presence of hyperinflation, not inflation, which will undermine the global economic recovery in the post-pandemic period. Hence, from a global perspective, as Deutsche Bank and other institutions have pointed out, the increase of inflation will be a long-term trend, which will reverse the longstanding low inflation from 2008. The rise in inflation is not only a monetary issue caused by extraordinary policies, it is a manifestation of long-term economic structural problems such as the changes in the global industrial chain and increased economic differentiation too.
As China's economic wellbeing is subjected to the influence of the international economy, the degree of inflation that it faces too will feel the global impact. As its macroeconomic policies have departed from the unconventional state of responding to the pandemic, it is even more crucial for China to consider the depth and breadth of the domestic market to increase economic stability. Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, recently stated that the logic of the overall macro policies may shift to risk balancing. This means suppressing fluctuations in economic operations in the short term, that is, the so-called counter-cyclical adjustment, now there is an increasing need to balance the risks as well. From this point of view, the inflation may cause short-term disturbances, but it is still necessary to promote the balance of economic growth from the two ends of demand and supply long term. This is to increase the potential growth rate through economic structural reforms that concentrates on inner circulation within the dual-circulations to resolve the problem of demand growth.
Final analysis conclusion:
The constraints on the supply and demand of the Chinese economy mean that inflation does not constitute a major risk. In the long run, under the backdrop of changes in the global economic environment, the moderate rise in inflation is forming a long-term trend, which means that macroeconomic stability and balance are more crucial for China.
