China Strikes to Tame Inflation Earlier than Costs Rise Too A lot

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SHANGHAI – Prices in the United States and around the world are skyrocketing, leading to mounting warnings that a wave of inflation could threaten the global economy if it continues.

China isn’t waiting to find out.

Beijing is taking quick steps to protect its factories and workplaces from rising costs. It has deterred steelmakers and coal producers from raising prices. It has vowed to investigate price gouging and hoarding. And it has allowed its currency to soar in value to levels not seen in years, making it a more valuable and powerful tool for buying up grain, meat, petroleum, minerals and other important world goods.

Rising prices in China, by far the largest manufacturer and exporter, were felt worldwide.

Annabelle New York, a Manhattan-based importer and distributor that sells down parkas and other high-quality apparel to department stores and other retailers, has already hiked prices 10 percent earlier this spring. But the company’s cost of goods from China has increased 20 percent, said Bennett Model, the company’s CEO and president.

Chemicals used to make the synthetic fabric covers of parkas have become more expensive with the rise in world oil prices. Down feathers, for which China is the world’s dominant producer, have become more expensive. And trans-Pacific freight costs have tripled for some shipments as air carriers and shipping lines struggled to keep up with demand.

It was only the fear of losing customers that kept Mr. Model from passing all these higher costs on to American businesses. Instead, he has accepted tighter profit margins.

“If I really wanted to cover all of the increases, the price would be prohibitive right now,” he said.

It is far from certain that the current rise in global inflation will be permanent. Many economists assume that price increases will moderate once companies address supply bottlenecks through factory closures and other measures during the coronavirus pandemic.

But China has clear reasons to fear inflation. The breakneck economic growth of the past few decades has been regularly accompanied by soaring prices, which aroused anger across the country. Rising prices contributed to the demonstrations in Tiananmen Square in Beijing in 1989. The authorities have long used informal price controls and subsidies to prevent rising costs from being felt in China’s supermarkets and at the family dining table.

For some goods, prices actually go up. Paper makers raised volume prices for products like napkins and toilet paper four times this spring. Soybeans for tofu are getting more expensive.

But at the moment, Chinese manufacturers are more likely than consumers to feel the price increases. Wholesale prices in China were nearly 7 percent higher in April than a year earlier when the pandemic hit prices. More expensive iron ore from Australia and corn from the US are responsible for much of this increase.

A week ago, China’s cabinet announced subsidies for small businesses to allow them to afford the rising cost of raw materials. New restrictions have been imposed on trading raw materials for future deliveries to prevent speculation. Export taxes were raised on some types of steel in order to keep more of the metal in China.

At a cabinet meeting on May 19, Prime Minister Li Keqiang ordered officials “to fight monopoly and hoarding resolutely and to strengthen market surveillance in accordance with laws and regulations.”

Government action can slow but not stop the rise in wholesale prices. Companies that hold on to rising raw material costs will eventually find ways to raise prices or simply stop production. Paper makers, caught between soaring raw pulp costs and a multitude of pressures not to raise paper prices, closed some of their mills for maintenance this spring.

So far, price increases do not seem to have reached Chinese consumers. One reason is that the Chinese domestic economy has not yet fully recovered from the pandemic. Lack of consumer spending means fewer households are raising prices for goods like pork chops, which have gotten a little cheaper recently, and even men’s underwear for which prices haven’t changed.

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Updated

June 3, 2021, 8:18 p.m. ET

Vendors in a covered market in Shanghai recently said they see no signs of rising food prices yet. For example, egg and beef prices have barely changed.

“The cost of living has barely changed, the price of green vegetables is always the same,” says Yang Yuxia, who has been selling eggs from chickens, pigeons and other birds at a stall there since 1998.

But non-staple food retailers were already cautiously observing price increases from their suppliers.

“Of course, I’m worried that prices will go up – if prices go up, I will have fewer customers,” said Gao Hong, a freshwater eel and shrimp seller in a shop across the street from the market.

China’s consumers are also protected by the country’s surplus of factories producing basic necessities such as clothing and home appliances. The overcapacity ensures that buyers have many competitors to choose from. This makes it difficult for manufacturers to pass price increases on to buyers.

“Those who have less bargaining power along the supply chain will bear more costs,” said Wang Dan, chief economist at Hang Seng Bank China. In China, companies tend to have less bargaining power than retailers and consumers earlier in the supply chain.

However, China’s higher prices could spread overseas. The country’s heads of state and government are trying to counter the risk of inflation in part by allowing the value of the currency to rise.

The renminbi has been near its strongest level against the US dollar since mid-2018. A dollar now costs about 6.4 yuan, down from 7.1 about a year ago.

The renminbi is up 2.2 percent against the dollar since the beginning of this year, adding a fraction of a penny each in value. But China is spending huge sums on dollar-priced resources – $ 176.2 billion on crude oil imports last year, for example, and another $ 50.8 billion on grain imports. These pennies add up quickly.

China’s currency has long been a hot political issue. American lawmakers and officials over the years have accused Beijing of wrongly keeping the currency weak in order to give the country’s exporters a competitive advantage in overseas markets.

But in this case, Chinese officials simply sat back and let global forces strengthen the currency. As the United States has raised and spent large amounts of money in recent months to counter the economic impact of the pandemic, the dollar has started to slide against many currencies, including the renminbi, but also the euro.

“The appreciation of the renminbi is being driven by the good performance of the Chinese economy,” said Gary Liu, an independent economist in Shanghai. “The US is producing too much money now and the dollar is softening as a result.”

However, a stronger currency has its downside, and Chinese officials appear to be stepping in to stop further hikes. The stronger currency makes Chinese goods less attractive in other markets. At the moment, however, the world seems happy to buy Chinese goods. Still, on May 27, the People’s Bank of China warned currency traders not to believe that further appreciation is a one-way bet.

In the meantime, the stronger renminbi could drive up the price of Chinese goods in the US and increase price pressure there, albeit in a largely moderate manner.

A US Bureau of Labor Statistics index of the average prices for imports from China shows that prices fell about 2 percent from the summer of 2018 to the start of the pandemic and then leveled off. Now those prices are up 2 percent since November.

“Does China export inflation?” Said Louis Kuijs, a China specialist at Oxford Economics. “It’s not that obvious in renminbi terms. But in US dollars it’s getting bigger and bigger. “

Lin Qiqing and Liu Yi contributed to the research.