For China, excess economic stimulus not as risky as tapering stimulus too quickly, economists say

Soaring commodity prices raise questions about whether China created too much demand for raw materials by overcompensating for economic damage from pandemic

But analysts say higher prices were the direct result of surging post-pandemic demand, coupled with supply shortages of crucial commodities such as steel

Reading Time:5 minutes

Domestic prices of raw materials – crucial ingredients in the infrastructure and real estate boom that has powered China’s economic recovery – have soared in recent weeks. Photo: Xinhua

Published: 6:30am, 26 May 2021Updated: 6:55am, 26 May 2021

China’s economy is not at risk of overshooting on economic stimulus, despite the recent strong rise in commodity prices, and any attempts to aggressively taper economic support would be more detrimental than helpful, according to economists.

The domestic prices of steel, copper, coal and other raw materials – key ingredients in the infrastructure and real estate building boom that has powered China’s relatively quick recovery – shot up to record levels in recent weeks on the back of strong demand, raising questions about whether Chinese authorities overcompensated for the economic damage caused by the pandemic and created excess demand for raw materials.

The high price of steel and other raw materials has forced Chinese manufacturers, particularly smaller private-sector firms that spoke exclusively to the Post, to take the extreme step of rejecting new customer orders outright because they can no longer make a profit, despite continued strong global demand for products made in China as the rest of the world strides towards recovery.

The PBOC will step in if inflation becomes really high – say, close to double digits – but it will be mindful not to step on the brakes too soon

Raphie Hayat, Rabobank China economist

Economists have also downplayed the risk of sustained broad-based inflation, calling the recent rise in prices a short-term phenomenon caused by China’s economic recovery and the comparison with the low base of depressed prices caused by the pandemic shock a year ago.

It is also unlikely that China’s central bank, the People’s Bank of China (PBOC), will react to current conditions with a knee-jerk tightening of monetary policy, according to Rabobank China economist Raphie Hayat.

“I don’t think China will be overstimulated this year. If anything, I am worried that the central bank’s plans to curb credit growth will go too far and start a wave of defaults among China’s highly leveraged state-owned firms,” he said. “That is not our base case, but I see this as a clear risk.”

“On the inflation front, I still think the rise in inflation is short-term, rather than long-term, in nature. For one, it is a base effect – prices declined at the height of the [coronavirus] crisis in China last year, which means any move back to normal prices is high in percentage terms.”