全球通胀上涨与中华人民共和国消费价格 (Rising Global Inflation and Consumer Prices in the People’s Republic of China)

Although global inflation and commodity prices are on the rise, spillovers to consumer price inflation in the People’s Republic of China (PRC) are expected to be limited. Consumer price inflation in the PRC has been driven mainly by domestic factors during the past decade, while commodity price shocks that led to higher producer costs hardly affected consumer prices. Reasons for these developments include a consumer basket of domestic products, anchored inflation expectations, and system buffers to absorb commodity price shocks. Though contagion risks of higher global inflation and commodity prices to inflation seem limited, possible transmission channels include further rising commodity prices and a shift in inflation expectations in the PRC. This note aims at providing policy recommendations on minimizing inflation transmission channels and containing inflationary expectations.


摘要
• Global inflation and commodity prices are on the rise, but spillovers to the consumer price inflation in the People's Republic of China (PRC) are expected to be limited. While rising commodity prices are a possible transmission channel driving PRC producer prices, a pass-through to consumer prices should be modest.

尽管全球通胀和大宗商品价格不断上涨，但预计其对中华人民共和国(中国)居民消费价格的溢 出效应有限。虽然大宗商品价格上涨是驱动中国工业生产者出厂价格的潜在传导渠道，但其对居 民消费价格的传导作用较小。
• During the past decade, consumer price inflation in the PRC has been driven mainly by domestic factors, such as food price shocks. Commodity price shocks that led to higher producer costs hardly affected consumer prices. Also, changes in global inflation (expectation) have had barely an impact on domestic consumer price inflation. Reasons for these developments include a consumer basket of domestic products, anchored inflation expectations, and system buffers to absorb commodity price shocks.

过去十年，中国的居民消费价格主要由食品价格冲击等国内因素推动。大宗商品价格冲击导致生产 成本上升，对居民消费价格的影响很小。此外，全球通胀(预期)的变化对国内消费价格通胀几乎 没有影响。形成这些现象的原因包括：以国内产品为主的一篮子消费品，锚定的通胀预期，以及吸 收大宗商品价格冲击的系统缓冲。
• Contagion risks of higher global inflation and commodity prices to inflation seem limited. Possible transmission channels are further rising commodity prices and a shift in inflation expectations in the PRC. Based on international experience, this note aims at providing policy recommendations on minimizing inflation transmission channels and containing inflationary expectations.

I. INTRODUCTION
1. Strong fiscal and monetary stimulus in advanced economies, increased savings during the coronavirus disease (COVID-19) pandemic and pent-up demand, and large-scale vaccinations are contributing toward a strong demand recovery this year in large economies, thus generating higher inflation expectations.
2. Temporary supply constraints, base effects from last year's low oil prices, and a rapidly closing output gap suggest that inflation will pick up this year in major world economies. However, much of it is expected to be temporary. The fiscal stimulus packages in advanced economies have been mostly cash injections and temporary support. There is little sign of additional stimulus measures if the economies recover, and new stimulus packages would likely be financed by tax increases.
3. Recent increases in bond yields in advanced economies have added to inflationary concerns and possible spillover effects to developing countries. However, even after these increases, long-term yields are still close to historical lows and much of the rise in yields reflects expectations of a strong economic recovery rather than compensation for higher long-term inflation.
4. Under the current circumstances, a scenario of rising global interest rates poses little challenges to the economy of the People's Republic of China (PRC). There are no signs of depreciation pressure on its currency nor growing unexplained capital outflows. On the contrary, with strong gross domestic product (GDP) growth and a sizeable current account surplus, the renminbi has been under appreciation pressure after the PRC has recovered from the COVID-19 shock earlier than other economies. 5. At the same time, commodity prices rose rapidly in the first 5 months of 2021. For example, the price of copper, a key input in electronic equipment, reached a record high in late May 2021. Commodity price increases have been driven by the recovery in global economic activity, including strong demand in the PRC, and supply disruptions for some metals. After the COVID-19 shock, production capacities in some major commodity-exporting countries are still recovering.
6. Consumer price inflation has stayed low in the PRC, reaching 1.3% in May 2021, and the Asian Development Bank (ADB) forecasts suggest it will remain so. At the same time, the possibility exists that rising global inflation shifts inflation expectations-internationally as well as domestically. Also, rising commodity prices could lead to higher consumer price inflation in the PRC. Based on past experiences, this policy note analyzes the potential impact of global inflation and rising commodity prices on consumer prices in the PRC and aims to provide policy recommendations based on international best practices.

II. INFLATIONARY SPILLOVERS
7. Against the global demand recovery, concerns about inflationary spillovers are rising in developing Asia. At present, however, the risks remain manageable, and the conditions in developing Asia are more favorable now than they were in the 1980s and 1990s.
8. In the past 2 decades, central banks in developed nations have attempted to create more inflation without success. Quantitative easing has driven interest rates lower in advanced economies.
It remains an open question if this policy can be continued in case inflation rises for some time, and inflation expectations start shifting upward. In such a scenario, central banks in advanced economies might be forced to address inflation concerns and accept higher rates.
9. Rising interest rates in advanced economies could cause capital outflows from emerging economies and depreciation pressure on their currencies. However, initial conditions in developing Asia are more favorable now than they were during the taper tantrum of 2013, when the United States (US) Federal Reserve announced a gradual reduction in quantitative easing, which sent bond prices lower while yields went up. Net portfolio flows to the region over the past 3 years have been less than in the years prior to 2013. Today, current account positions are good, real exchange rates have not strengthened as much, and reserve cover is adequate. The PRC looks particularly robust-strong economic growth, a sizeable current account surplus, and sizeable reserves.

III. INFLATION IN THE PRC: MAIN DETERMINANTS, TRENDS, AND PROSPECTS
10. During the past decade, consumer price inflation in the PRC has been mainly driven by domestic factors, such as food price shocks. Commodity price shocks, leading to higher producer costs, hardly affected consumer prices. Also, changes in global inflation (expectation) have had barely an impact on domestic consumer price inflation. Reasons for these developments include: (i) Basket of domestic products. Consumer price inflation in the PRC is domestic inflation (versus imported inflation) as the basket of goods consumed is predominantly local. Hence, rising prices for consumer goods in advanced economies do not usually impact consumer prices in the PRC. In the past years, PRC consumer price inflation has been driven by food price shocks (e.g., African swine fever or bad harvests), but such shocks have only had a temporary impact on inflation. Nonfood inflation has been modest in the past decade as commodity price shocks were buffered as detailed under (iii) in this para.
(ii) Inflation expectation. Inflation expectations have been anchored in the PRC for at least a decade. The annual inflation target set by the government has frequently been met in past years though the target has fluctuated slightly over time. ADB forecasts that inflation will 观察与建议 reach 1.5% (with real GDP growth at 8.1%) in 2021 and 2.3% (with growth at 5.5%) in 2022. Increasing inflation expectations, rational or irrational, will create inflation if not managed properly. Episodes of temporary high inflation occurred in the PRC in the past, including in the late 1980s. However, prevailing moderate inflation expectations-domestically as well as in most advanced economies-make it unlikely for such episodes to return in the near future. Also, there are more sophisticated macroprudential tools available today.
(iii) Commodity price shocks. A possible transmission channel runs from rising global commodity prices to higher producer prices in the PRC that are passed on to consumer prices. However, the transmission of price increase in upstream industries to consumer prices seems to have been limited in the PRC, which ranks as the world's second largest importer. For example, the sharply rising producer prices in the second half of the 2010s during the supply side structural reforms had only a limited pass-through effects on consumer prices. Given its importance, this transmission channel warrants further analysis as detailed below.
Commodity price increases tend to reach consumer prices moderately and with a time lag in the PRC. One explanatory reason is that, along the value chain, commodity price increases are buffered by market participants that partly absorb price shocks along the value chain. This is possible since, for domestic consumer products, most parts of the value chain are in the country, and prices of many input factors can be influenced by the government, either by regulatory measures or by administering prices, i.e., setting prices. For example, in 2021, the government took measures to curb soaring steel prices to ease price pressure in downstream sectors. These sectors have to absorb price increases for their inputs as they often lack price-setting power because of strong competition.
Administered prices, e.g., for water and electricity, can temporarily deviate from the price development of their inputs. In the PRC, upstream industries (i.e., mining and quarrying, and oil and gas extraction), the energy sector, utility supply, and raw material production tend to be dominated by state-owned enterprises. Government guidance can force energy suppliers and utilities companies to keep prices stable, or only gradually increase them, while their input cost rise, thereby reducing their profits or even temporarily pushing them into the loss-making zone. However, these companies are able to smooth profits over time, which allows them to temporarily halt price increases and help limit a pass-on of higher commodity prices. Since commodity prices (energy, metals, agriculture) do not need to develop in synch, some industries can record profits while others do not. Challenges can arise in case many commodities show continued price increases, as it is the case in the upswing phase of a major commodity price cycle.

IV. POLICY RECOMMENDATIONS
11. As mentioned in section III, contagion risks of higher global inflation and commodity prices to inflation seem limited. Possible transmission channels are further rising commodity prices and a shift in inflation expectations in the PRC. Thus, policy recommendations focus on these two areas: (i) Let the renminbi appreciate against the US dollar in line with fundamentals. As commodities are traded in US dollar, a stronger renminbi makes commodity imports cheaper for domestic producers in renminbi terms. As the current account stays in surplus and is expected to remain there in the near future, a gradual appreciation of the renminbi should not endanger the exporters' price competitiveness. Also, domestic interest rates could be increased, thus strengthening the renminbi, if needed. To gain more flexibility in monetary policy, the central bank should tighten its focus on inflation as suggested in the recommendations under (iii)-(v) in this para.
(ii) The efficiency of domestic commodity markets should be strengthened. As the PRC accounts for about half of global metal (aluminum, copper, lead, nickel, tin, zinc) consumption, there is a sizable internal market for them. To limit the potential for collusion and market price manipulation, domestic commodity market regulation should be strengthened and market transparency increased. Also, for commodities that face severe supply side constraints, working on improving supply via increasing domestic capacity or investing in international capacity can help prevent periods of prolonged price pressures.

(iii) The transparency and communication of monetary policy should be strengthened.
Though inflation expectations are anchored in the PRC, monetary policy actions could be better communicated by regular publications, press conferences, and public speeches by key officials. The publication of detailed price series would enhance transparency and help market participants (and observers) better understand inflation dynamics, thus curtailing inflation expectations.
(iv) The central bank should primarily focus on inflation. To this end, it would be important to strengthen the coordination between monetary and fiscal policies to reinforce the central bank's autonomy, which in turn will increase the central bank's credibility to control inflation. While credit growth is moderating from its high expansion rate, thus supporting the recovery of the economy from the COVID-19 shock, housing investment is still growing at a solid rate. Part of the challenge for monetary policy is that sectors recovered at different speed. While some sectors of the economy could cope with higher lending rates, others could not. The differences should be addressed through fiscal and structural policies. Having the central bank set interest rates and provide liquidity to support weaker sectors on a continuous basis limit its ability to hike rates to curb inflation, if needed. Also, a thorough understanding of complex inflation dynamics requires more accurate data, frequent surveys, and advanced forecasting techniques. Thus, it is important to ensure the central bank's institutional capacity, which would prepare it to shift to inflation targeting.
(v) In the medium-to-longer term, an explicit low inflation target would be an appropriate nominal anchor for the PRC. Anchoring monetary policy with an explicit inflation objective would allow the central bank to tie down inflationary expectations. However, considering the limitations of the PRC's monetary and banking system, and in the absence of immediate reforms, it would be premature for the central bank to formally adopt an inflation-targeting regime. Nevertheless, some important characteristics of the anchoring system should be considered. For instance, the central bank, by itself or jointly with the State Council, could adopt and communicate a longer-term inflation target. It would be important to grant the central bank the operational independence required to use monetary policy and exchange rate instruments to achieve the said target. Although global inflation and commodity prices are on the rise, spillovers to consumer price inflation in the People's Republic of China (PRC) are expected to be limited. Consumer price inflation in the PRC has been driven mainly by domestic factors during the past decade, while commodity price shocks that led to higher producer costs hardly affected consumer prices. Reasons for these developments include a consumer basket of domestic products, anchored inflation expectations, and system buffers to absorb commodity price shocks. Though contagion risks of higher global inflation and commodity prices to inflation seem limited, possible transmission channels include further rising commodity prices and a shift in inflation expectations in the PRC. This note aims at providing policy recommendations on minimizing inflation transmission channels and containing inflationary expectations.

About the Asian Development Bank
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members-49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.