Benefiting from a surge in demand for raw materials as the economy recovers, commodity prices have soared so far this year, putting pressure on China, a major importer of raw materials, as Chinese central bank officials said Friday (21) that China should moderate the appreciation of the yuan to offset the impact of higher import prices.
China’s industrial producer price index (PPI) in April showed that inflation is heating up at the fastest pace in 3.5 years, and Beijing has pledged to take measures to crack down on commodity prices and prevent them from being passed on to consumers.
As a major global consumer of commodities, the impact of international import prices is inevitable, but China should “increase the flexibility of the exchange rate and allow the yuan to appreciate moderately to properly offset the import price effect,” said Lu Jinzhong, director of the People’s Bank of China (PBOC) Shanghai headquarters research department.
The global economic recovery and the ultra-loose monetary policies adopted by major central banks have pushed up import prices, which could hit Chinese companies and raise banks’ credit risk, and Chinese companies should hedge their price risk through tools such as futures, said Lu Jinzhong.
PBOC said that China’s industrial producer price index may move further higher in the second and third quarters, taking into account rising commodity prices and the low base period of last year’s data.
The yuan has weakened sharply against the U.S. dollar since early April. The yuan has appreciated more than 2% against the U.S. dollar, and market traders are debating how far the Chinese Communist Party authorities can tolerate the yuan’s appreciation.
While the market has been pushing for the internationalization of the yuan, the Chinese Communist authorities have maintained tight control over the yuan’s exchange rate because of concerns that excessive volatility could affect cross-border capital flows and hurt the economy.
However, if China wants to expand the internationalization of the yuan, it will eventually have to relinquish control of the exchange rate, said Zhou Chengjun, director of PBOC’s Institute of Finance.
China’s determination to crack down on commodities is clear, as Chinese Premier Li Keqiang reiterated his goal of price control this week, saying he will raise export tariffs on some steel products, impose a zero import tentative tax rate on pig iron and scrap steel, and cancel export tax rebates on some steel products to promote increased supply in the domestic market.
In terms of trading, China will also strengthen the supervision of the futures and spot markets, and take targeted measures to rectify abnormal trading and malicious speculation in due course. Strictly investigate monopoly agreements, dissemination of false information, price gouging and other acts in accordance with the law.
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