MNI INTERVIEW: Limited PPI Impact From China's Supply Reforms

China’s latest supply-side reforms are expected to have a more modest impact on producer prices compared to the sweeping industry capacity cuts of 2015, a leading commodity policy expert told MNI, highlighting that the more targeted approach aims to curb harmful competition in emerging industries.

While price support remains a policy objective and heavy industry continues to face scrutiny, this year’s “anti-involution” campaign is unlikely to match the effectiveness of 2015’s policies that drove the Producer Price Index (PPI) to 0.1% in September 2016 after 54 consecutive months of decline, said Shanghai-based Liao Na, CEO of GL Consulting and VP of Mysteel OilChem. 

Unlike the 2015 campaign, which targeted outdated capacity in sectors like steel and cement, the current reforms focus on restructuring excess capacity in private enterprises and emerging sectors, reflecting authorities’ more refined and cautious policy stance, added Liao, who is also an National Development & Reform Commission (NDRC) affiliated think-tank member. “In 2015 both supply and demand were expanding, which provided solid support for consumption,” Liao explained. Insufficient demand represents the current challenge, she added. While capacity reductions this year may ease downward pressure on PPI, a sustained return to growth will ultimately depend on demand recovering, Liao argued.

She also noted that 2015’s approach involved direct output reductions and ministerial inspections, whereas current reforms emphasise setting higher standards for project approvals and banning the expansion of redundant capacity. China’s Producer Price Index fell 3.6% y/y in July, the same as June's 3.6% drop, marking the 34th straight month of decline and missing market expectations of a 3.3% fall.

OIL IMPACT

Although the oil sector has not been specifically targeted in this year’s campaign, it continues to face growing pressure to eliminate excess capacity, Liao said, estimating that China’s refining capacity, which peaked at 957 million tonnes per annum in 2024, will decline to about 937 million tonnes by 2030.

Earlier measures, including the State Council’s 2024-2025 Action Plan for Energy Conservation and Carbon Emissions Reduction, mandated the phased retirement of outdated capacity and imposed stricter controls on new additions in industries such as petrochemicals, building materials, and ferrous and non-ferrous metals – policies that are now beginning to yield tangible results, Liao added.

An energy policy expert recently told MNI that significant investment in China’s energy infrastructure over the past two years has helped reduce the risk of widespread industrial disruptions this summer despite record-breaking temperatures. (See MNI INTERVIEW: China Power Surge Unlikely)