China isn’t waiting to find out.
Beijing is moving swiftly to protect its factories and workplaces from rising costs. It has discouraged steel makers and coal producers from raising prices. It has vowed to investigate price-gouging and hoarding. And it has allowed its currency to rise in value to a level unseen in years, giving it a more valuable and powerful tool for buying up the world’s grain, meat, petroleum, minerals and other essentials.
Rising prices in China, by far the world’s biggest manufacturer and exporter, could be felt around the world. China’s statistical agency announced on Wednesday morning that prices charged by factories, farmers and other producers had soared 9 percent in May compared to a year earlier, when the pandemic was holding down their costs. It was the biggest increase since September 2008.
Annabelle New York, a Manhattan-based importer and distributor that sells down-filled parkas and other high-end apparel to department stores and other retailers, already raised prices 10 percent this spring. But the company’s costs for merchandise from China are up 20 percent, said Bennett Model, the company’s chief executive and president.
Chemicals to make the parkas’ synthetic fabric shells have become costlier as world oil prices rise. Down feathers, for which China is the world’s dominant producer, have become more expensive. And trans-Pacific freight costs have tripled for some shipments as air cargo companies and shipping lines have struggled to keep up with demand.
Only the fear of losing customers has prevented Mr. Model from passing along all these higher costs to American stores. He has accepted narrower profit margins instead.
“If I really wanted to cover all the increases, the price would be prohibitive right now,” he said.
It’s far from certain that the current bout of global inflation will last. Many economists believe price increases will moderate once companies clear supply bottlenecks caused by factory closings and other measures taken during the coronavirus pandemic.
But China has clear reasons to fear inflation. Its breakneck economic growth over recent decades has periodically been accompanied by surging prices that provoked anger across the country. Rising prices contributed to the demonstrations in Tiananmen Square in Beijing in 1989. The authorities have long used informal price controls and subsidies to prevent rising costs from being felt in China’s supermarkets and at the family dinner table.
For some goods, prices are indeed rising. Paper manufacturers have raised bulk volume prices for products like napkins and toilet paper four times this spring. Soybeans for tofu are becoming costlier.
But for now, Chinese manufacturers, rather than consumers, are feeling the price increases. Costlier iron ore from Australia and corn from the United States account for much of the rise.
China’s cabinet announced subsidies a week ago for small businesses to help them afford spiraling costs for commodities. New limits have been imposed on the trading of commodities for future delivery to discourage speculation. Export taxes have been raised on some kinds of steel to keep more of the metal inside China.
At a cabinet meeting on May 19, Premier Li Keqiang ordered officials to “resolutely crack down on monopoly and hoarding in accordance with laws and regulations, and strengthen market supervision.”
Government measures may slow but not stop wholesale price increases. Companies stuck with rising costs for raw materials eventually find ways to raise prices or else just suspend production. Paper producers, trapped between surging costs for raw pulp and a variety of pressures not to raise paper prices, have shut down some of their factories for maintenance this spring.
So far, price increases don’t appear to be trickling down to China’s consumers. China’s consumer price index was only 1.3 percent higher in May than a year earlier.
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One reason is that the Chinese domestic economy has not yet fully recovered from the pandemic. Lackluster consumer spending means fewer households are bidding up the prices of goods like pork chops, which have become a little cheaper lately, and even men’s underwear, for which prices have not changed.
Vendors at a covered market in Shanghai said on a recent afternoon that they saw no sign yet of rising food prices. Egg and beef prices, for example, were little changed.
“The cost of living hasn’t changed much, the price of green vegetables is always” about the same, said Yang Yuxia, who has been selling eggs from chickens, pigeons and other birds at a stall there since 1998.
But merchants for foods that are not staples were already watching warily for price increases by their suppliers.
“Of course I’m worried about the price going up — if the prices go up, I will have fewer customers,” said Gao Hong, a vendor of freshwater eels and shrimp at a store across the street from the market.
China’s consumers are also protected by the country’s surplus of factories that make essentials like clothing and household appliances. The overcapacity ensures that shoppers have plenty of competitors to choose among. That makes it hard for manufacturers to pass along price increases to buyers.
“Along the supply chain, whoever has less negotiating power will bear more cost,” said Wang Dan, the chief economist at Hang Seng Bank China. In China, the companies at earlier stages of supply chains tend to have less bargaining power than retailers and consumers.
China’s higher prices could spread abroad, however. The country’s leaders are trying to address the threat of inflation in part by letting its currency rise in value.
The renminbi is near its strongest point against the U.S. dollar since mid-2018. A dollar now buys about 6.4 renminbi, versus more than 7.1 about a year ago.
The renminbi has risen 2.2 percent against the dollar since the start of this year, making each only a fraction of a penny more valuable. But China spends huge amounts of money on resources priced in dollars — $176.2 billion just for crude oil imports last year, for example, and an additional $50.8 billion for grain imports. Those pennies add up quickly.
China’s currency has long been a hot-button political issue. American lawmakers and officials over the years have accused Beijing of unfairly keeping the currency weak to give the country’s exporters a competitive advantage in foreign markets.
But in this case, Chinese officials have simply sat back and let global forces make the currency stronger. As the United States has borrowed and spent heavily in recent months to counteract the economic effects of the pandemic, the dollar has started to slide against many currencies, including the renminbi but also the euro.
“The appreciation of the renminbi is driven by the good performance of the Chinese economy,” said Gary Liu, an independent economist in Shanghai. “The U.S. is now producing too much money supply, and as a result the dollar is going soft.”
A stronger currency has its downsides, however, and Chinese officials appear to be stepping in to halt further increases. The stronger currency makes Chinese goods less appealing in other markets. For now, the world seems happy to keep buying Chinese made goods anyway. Still, the People’s Bank of China warned currency traders on May 27 not to think that further appreciation was a one-way bet.
In the meantime, the stronger renminbi could push up the price of Chinese-made goods in the United States, adding to price pressures there, though in mostly moderate ways.
A U.S. Bureau of Labor Statistics index of average prices for imports from China shows that prices fell about 2 percent from the summer of 2018 until the start of the pandemic and then leveled off. Now those prices have jumped 2 percent since November.
“Is China exporting inflation?” said Louis Kuijs, a China specialist at Oxford Economics. “In renminbi terms, it’s not so obvious. But in U.S. dollar terms, it starts to get more sizable.”
Lin Qiqing and Liu Yi contributed research.