MNI INTERVIEW: Iran War To Push China’s PPI Positive - Advisor

Rising global oil prices could push China’s producer price index (PPI) into positive territory as early as April after more than 40 months of contraction, while the impact on CPI is likely to remain limited due to falling food prices, a former chief economist at the National Bureau of Statistics told MNI on the sidelines of a press salon hosted by the All-China Journalists Association.

In China, a 10% rise in global oil prices typically lifts PPI by 0.5 percentage points, said Yao Jingyuan, also a special research fellow at the Counsellors’ Office of the State Council, who expects the gauge to turn positive as early as March or April despite uncertainty stemming from volatile oil prices.

Before the current outbreak of conflict in the Middle East, economists had already expected a positive PPI in Q3, supported by rising non-ferrous metal prices. (See MNI: China PPI To Turn Positive In Q3) PPI narrowed its prolonged year-on-year decline further to -0.9% in February.

While oil price shocks typically take about two weeks to transmit through the economy, China has mechanisms in place to mitigate excessive volatility and economic impact, Yao argued. China has strengthened its strategic petroleum reserves over many years, with storage bases built across the country as part of a long-term energy security strategy, he added. (See MNI INTERVIEW: Chinese Oil Reserves Enough For Short Iran War)

The nation’s domestic fuel pricing mechanism, administered by the National Development and Reform Commission (NDRC), also helps smooth volatility. When international crude prices move between roughly USD40 and USD80 per barrel, domestic fuel prices generally follow market movements. Beyond that range, authorities can intervene to stabilise prices, Yao said.

From this perspective, rising international oil prices will not create a major supply shock for China, but with over 70% of oil consumption dependent on imports, global price movements inevitably affect the domestic economy, Yao added. Although the mining industry will benefit from higher oil prices, China’s role in the petrochemical sector is primarily focused on downstream processing, meaning fertiliser, pesticide, textile, footwear, tyre and household appliance sectors are likely to face rising costs, he said. 

The country’s freight system also relies heavily on road and water transport, which account for about 70% and 20%, he added. 

CPI REBOUND

The CPI impact is likely to remain more subdued due to the significant influence of food prices, which account for about 29% of the basket, limiting the pass-through from oil prices, Yao said. CPI, which rose 1.3% y/y seasonally in February, may sit around 1% in March as prices for meat, vegetables and fresh fruit have declined following the Spring Festival holiday, he predicted. 

Demand-driven variety rather than imported inflation should support Beijing’s policy target of promoting a reasonable recovery in prices, Yao emphasised, adding that a reasonable rebound is measured by whether manufacturers make a profit and whether consumers are willing to buy.

SUPPLY-DEMAND IMBALANCE 

Despite providing some relief for low-income households, prolonged low prices can also suppress consumption, given consumers’ tendency to buy when prices are rising rather than falling, Yao cautioned, noting that the key lies in boosting residents' incomes and improving the quality of supply. 

Beijing’s upcoming income-boosting plan will prioritise raising revenues for low-income groups with a higher propensity to spend, as well as increasing residents’ property income by stabilising the real-estate sector and supporting the stock market, including measures to increase the proportion of long-term capital and close loopholes that allow cash-outs soon after listing, he added.

The food industry is also becoming increasingly industrialised and scaled, Yao said, citing the pork sector as an example of excessive focus on output. The rapid expansion of large-scale, multi-storey pig farms has boosted supply but reduced meat quality, discouraging consumption and pushing prices down to levels at which most small-scale pig farmers lose money. “Some people say pork prices will jump again. I doubt it,” he said.

Instead, China should look to agricultural models in Australia and New Zealand, where farming systems balance cultivation and livestock breeding at a moderate scale, supporting both supply and product quality, Yao concluded.