Record Commodity Prices Pose Dilemma For Beijing

By Ye Xie, Bloomberg Markets Live strategist and reporter

Three things we learned last week:

1. Soaring commodities put Beijing in a quandary. China set its growth target at about 5.5%, the higher end of economists’ estimates. That implies more stimulus is in the cards. But stimulating the economy via infrastructure and housing construction may further lift commodities. An index tracking China’s local commodity prices has already climbed to an all-time high, reflecting a global rally following Russia’s invasion in Ukraine. China’s weak consumption – retail sales growth has slowed to 1.7% from 8% in 2019 – means that manufacturers, especially small firms, cannot fully pass on the costs, squeezing their margins.

To curb commodity prices, Beijing has imposed price controls and curbed speculation. It also offered relief to struggling small enterprises through loan deferments and tax cuts. Still, “the dilemma facing policy makers is how to stimulate demand in those parts of the economy struggling with weak demand and disinflationary trends, without also lifting demand in those sectors that are seeing destabilizing levels of inflation,” said China Bull Research.

2. One way to shore up the economy is to ease the zero-Covid policy, and Beijing signaled that such a move is possible. China is looking for ways to reduce the “social costs” of its strict Covid restrictions, an official said last week. The question is when and how. It’s another dilemma Beijing is facing. The Covid crisis in Hong Kong underscores the dangers of virus spread in a place where immunity is low. Meanwhile, the new Covid cases are rising on the mainland, showing the current strategy is less effective to contain fast-spreading omicron.

3. With the exception of the ECB, central banks appear to be pressing on when it comes to tightening of monetary policies, despite financial market turmoil amid the Russia-Ukraine war. The Bank of Canada raised rates for the first time since 2018, as expected, and signaled more tightening is coming. The Fed’s Jerome Powell said he supports a 25bp hike this month and didn’t rule out a larger move at some stage. By comparison, ECB officials, who meet on March 10, are set to take a timeout from plotting the exit from stimulus. Euro-zone financial conditions have tightened to a level last seen during the depths of the pandemic in 2020.