HONG KONG – As inflation rises around the world, the world’s second largest economy has kept it away.
Consumer prices in China rose just 1.5% in March from a year earlier, after rising 0.9% in 2021 from a year earlier.
In contrast, the annual inflation rate in the US was 8.5% in March and 7.5% in 2021, the highest rate since 1982. In the eurozone, annual inflation reached a record 7.5% in April. About 71 percent of the 109 emerging and developing countries experienced inflation of 5 percent or more in 2021, twice as much as at the end of 2020, the World Bank says.
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Although Chinese inflation is expected to rise slightly when new data are released this week, most economists believe it will not exceed the government’s year-on-year target of around 3% in 2022.
This is partly because consumer demand, an important source of U.S. inflation, is currently extremely weak in China. This is also because China uses aggressive tactics, including price controls and protectionist trade actions, to prevent imported inflation from flowing to consumers. Analysts say the strategies have helped China in the short term, but have long-term costs and would be difficult to replicate in market-oriented economies.
China is less sensitive to demand-driven inflation than countries like the US because it relies more on investment than on consumption to boost growth.
But consumption is currently even less influential than usual. Beijing provided far fewer incentives than the U.S. during the pandemic, leaving households with less surplus money to spend. The wider economy has been stalled for months after authorities launched regulatory measures for the technology and real estate industries, and blockades linked to COVID froze activity in some cities.
Consumption in China “has been weak, is weak and will be weak in the future,” said Leland Miller, CEO of China Beige Book International, a research firm.
China still has to contend with imported inflation as it buys large quantities of oil, gas and grain from abroad, whose prices have jumped due to supply shocks, such as the Russian invasion of Ukraine.
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China’s producer price index, a measure of factory inflation that partly reflects producer prices for imported raw materials, rose 13.5% in October, the fastest in almost 26 years, although it retreated to 8.3% from a year earlier. March.
But China maintains huge reserves of strategic goods that it can use to curb price pressures.
Last summer, authorities began leaking metals, including copper and aluminum, from state reserves. He also released stocks of soybeans, rice and wheat.
In December, an official of China’s National Food and Strategic Reserves Administration said the country still has enough wheat stocks to meet demand for 1.5 years. Fitch Ratings says China had enough rice late last year to meet 103% of annual demand.
China can also call on state-owned enterprises and the state reserve system to act as a buffer by absorbing higher import prices for basic goods without immediately forwarding them to consumers, said Isabella Weber, an economist at the University of Massachusetts Amherst. For example, when oil prices become too high, Chinese refineries are expected to eat up part of the price increase, subsidizing gas costs to car owners. (Japan’s low inflation rate could be similarly due to the reluctance of companies to pass on higher wholesale prices to customers.)
“The Chinese government is particularly focused on price stability,” Weber said. “There is a very intense awareness of the importance of basic prices.”
China also uses trade policy to control prices, says Chad Bown, a senior fellow at the Peterson Institute for International Economics. Last year, it restricted domestic steel production exports and raised export taxes to tame rising steel prices at home. In March 2022, Chinese steel prices fell by 12% compared to May 2021, when it began to impose export restrictions.
All of these moves come with costs that increase over time. The government must pay to maintain its reserves. Subsidies for vehicle owners can ruin the profitability of state-owned refineries. Protectionist trade policies can lead to conflicts with other countries.
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But Chinese history gives the authorities a strong incentive to avoid destabilizing price increases. The escaped inflation of the 1930s and 1940s helped undermine the ruling nationalist government and open the door to takeover by the Communist Party. Some scholars say the jump in consumer inflation to 18.8% in 1988 sparked protests that culminated in a bloody crackdown in Tiananmen Square the following year.
Since then, Chinese inflation has been relatively tame. It last peaked at 5.9% during the global financial crisis in 2008 when the stimulus program raised asset prices. From 2011 and 2021, inflation averaged just 2.6%, official data show.
Other factors have also helped: pork, a staple food on Chinese tables, carries a lot of weight in China’s consumer price index, and its price has fallen by 30% in 2021 as pig stocks are replenished after a deadly African swine fever epidemic that led to rising prices in 2018
The biggest question for China is whether its price management tactics can be sustained in the long run if inflation becomes endemic around the world.
Recent closures that have closed tens of millions at home in Shanghai have provided insight into what inflation might look like in China. The closures caused logistical bottlenecks, making it difficult for truckers to deliver goods to the city. Many residents complained on social media that the prices of vegetables and other foods had doubled or increased as a result.
The propensity of other countries to emulate Chinese protectionism could pose another risk. Indonesia recently imposed a ban on palm oil exports, which could hit China as it relies heavily on imports.
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However, some economists argue that slow household spending on goods and services will remain a moderator of inflation in the foreseeable future.