China Ratchets Up Price Warnings as Inflation Fears Mount

China’s cabinet increased its rhetoric around surging commodity prices, announcing more specific steps to curb markets in order to keep inflation pressures at bay.

At a meeting chaired by Premier Li Keqiang Wednesday, the State Council said more effort needs to be taken to prevent rising commodity prices from being passed through to consumers, according to reports carried in state media.

The comments were stronger than those last week, with the cabinet Wednesday pledging more domestic supply to ease prices, tougher oversight on spot and futures markets, and vowing to crack down on speculation and hoarding. The warning helped to push commodity prices further down and also hit the stock prices of companies Thursday.

China’s factory gate prices rose at the fastest pace in more than three years in April, adding to global inflation risks and raising worries that price pressures may spread more broadly in the economy. Consumer inflation has been relatively benign so far, mainly due to falling pork prices. The People’s Bank of China has said producer-price inflation will likely stabilize later this year and the risks of imported inflation are overall controllable.

The cabinet said monetary policy should be kept steady, with the yuan kept stable at an appropriate and equilibrium level. More support should be given to small businesses via the relending and rediscounting tools, which provides funding to targeted firms at a lower cost, and banks should offer more non-collateral loans, it said.

The comments suggest authorities will use administrative price caps and supply measures to curb commodity prices, rather than tightening monetary policy, said Zhou Guannan, an analyst at Hua Chuang Securities.

“The State Council meeting sent a clear signal that monetary policy will remain stable and neutral, and will not tighten due to inflation,” she said. “For inflation caused mainly by lack of supply, the effect of monetary policy tightening is relatively limited.” The central bank doesn’t need to take direct tightening measures right now and the bond market doesn’t have to worry about liquidity tightening, she said.

China’s benchmark 10-year government bond yield is on course for its lowest close since September 2020. Chen Xi, an analyst at Pacific Securities Co., said yields are likely to fall to 2.8%-2.9% as bond bulls return.

“The biggest negative factor for the bond market -- that monetary policy may tighten because of inflation -- has been proved false,” Chen wrote in a note Thursday.

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