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What can China do to control record commodity prices?

(Bloomberg) – The rising cost of raw materials for industry and households is a threat to China’s economic growth and the purchasing power of its citizens. Prices are rising for everything from copper and steel used in construction to coal, the houses and Household heats up What can Beijing do to control the record-breaking rally? The answer is complicated by a number of factors, including pollution and import policies, which have only helped exacerbate supply constraints. As part of President Xi Jinping’s commitment to create a climate-neutral economy by 2060, Beijing has introduced production restrictions on metals such as steel and aluminum to reduce emissions Global economy recovered from pandemic, fueled by massive government incentives, particularly in the US. This can only dilute China’s efforts to contain markets. Aside from introducing price controls, Beijing has options that range from precise strikes on individual commodities to blunt instruments that would affect the entire economy. Trade Restrictions China’s busy commodity exchanges are a common suspect for Beijing when the government believes price movements are easing a little too wildly. The dramatic jump in iron ore on Monday sparked a stern reaction. The Dalian Commodity Exchange promised to “severely punish” unspecified violations in iron ore trading as it increased margin requirements and narrowed daily trading bands. The Shanghai Futures Exchange also pledged to streamline steel trading, while the Zhengzhou Exchange took a similar move on thermal coal. The aim is to cool down speculative flows that can attract investment waves and create dizzying price spikes. The problem is that this approach doesn’t necessarily help manage a physical market with its own dynamics. Steel prices are recovering worldwide without, for example, having a really significant futures market. Still, iron ore futures fell slightly in Dalian on Tuesday as rebar and hot rolled coils marched to new highs in Shanghai ahead of the new restrictions. Thermal coal has also set a new record. SupplyChina can rely on its huge government sector to help reduce bottlenecks. These efforts have had mixed results at best recently. Last month, the top economic planning agency asked miners to produce at their maximum winter production levels, which did little to detract from the market’s subsequent surge to all-time highs. In the case of gas, the unusually cold winter weather led to an official devaluation of the importers because they could not meet demand. This seems to have motivated some to move on with their shopping for this year. Efforts to increase energy supplies were disrupted by diplomatic tensions with Canberra. China has banned Australian coal imports, one of several restrictions on the flow of goods from barley to wine. At least two of the smaller Chinese gas importers are said to avoid buying additional gas from Australia for delivery next year. Release of Inventories China has considered selling approximately 500,000 tons of aluminum from its state reserves to cool the market. Prices initially fell on target before climbing back to their highest levels in a decade. China’s production of the light metal last year was 37 million tons, more than half of the world’s total. The nation holds supplies of materials like copper for food like soybeans as well as massive reserves of crude oil, but the amounts are unknown. Any indication that the reserve office is a buyer or seller can change markets dramatically. The longer-term plan could include adding more base metals to strategic reserves to ensure domestic supplies and cushion potential bottlenecks, though any government purchasing program now risks adding fuel to the current rally. FoodChina’s inventory is also building its agricultural buffer. The government has bought huge amounts of US corn for state reserves and can release them to suppress price spikes ahead of the domestic harvest in the fourth quarter. Authorities have also curtailed state wheat sales amid concerns that increased purchases of feed mills to replace expensive corn could raise prices for the new wheat crop that will be harvested in June. Beijing is also replenishing its soybean reserves and adding locally grown soybeans for the first time since 2017 to stem possible food inflation. The domestic harvest is not genetically modified and is used for foods like tofu rather than animal feed. China has also frequently released pork reserves to cool the rising prices of the country’s most widely consumed meat. Tax Incentives To save an economy cratered by the pandemic, China picked up its usual playbook: massive government-funded construction to stimulate demand and an expansion of credit that hit the housing market. This has helped bring a rocket below the price of steel and other building materials like copper and aluminum. China has slashed this year’s quota on debt sales, which usually finance infrastructure, and local governments have slowed the mark on new issues. Metals traders will look for further evidence that fiscal policy is tightening as the government focuses on preventing asset bubbles. The main concern is that record commodity prices will fuel inflation around the world and central banks will act too slowly to contain the tide. Last month, Chinese factory gate prices rose the fastest since October 2017, a spike that likely raised eyebrows at People’s Bank of China. All of China’s financial markets are in danger of finding signs that the PBOC will hasten monetary tightening as the nation is completing its recovery from the pandemic. For metals, stricter credit requirements would affect demand in a variety of sectors, from real estate to automobiles to consumer goods. However, Bloomberg Economics does not yet believe the central bank will be motivated to act right as consumer prices remain relatively subdued. More articles like this can be found at bloomberg.com. Sign up now to stay ahead of the game with the most trusted business news source © 2021 Bloomberg LP

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