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CF40 Young Economist Forum on Commodity Price Surge

Since the beginning of this year, commodity prices in China have surged due to multiple factors including price fluctuations on the global market. The price hikes have aroused growing concern in the market and among economists and regulators, being brought to the forefront of discussion these days.

Against this background, China Finance 40 Forum held a Young Economist Forum to discuss the impact of rising commodity prices and policy responses. The seminar was kicked off with a keynote speech by Mr. Tan Congyan, Vice President of China Institute of Finance and Capital Markets. Following him, Mr. Xu Xiaoqing, Chief Economist at DH Fund Management delivered a speech on the prospects of commodities. The two speeches were followed by comments from Mr. Rong Zhiping, CF40 Guest Member and former President of China Financial Futures Exchange and Mr. Gao Shanwen, Member of CF40 Academic Committee  and Chief Economist at Essence Securities.

The second half of the seminar was a roundtable discussion on the thematic topics joined by all participants. Attending the event were Xiao Gang, CF40 Non-Resident Senior Fellow, Li Bin,  CF40 Guest Member and Director-General of the Macroprudential Policy Bureau of PBC, Liang Hong, CF40 Member and Director of the Hillhouse Capital’s Institute of Innovation and Industry Studies, and Miao Yanliang, CF40 Member and Chief Economist at State Administration of Foreign Exchange Research Center, among other experts and regulators in the field.

What has caused the surge in global commodity prices? Most experts at the seminar believed that the mismatch between supply and demand caused by the COVID-19 pandemic was the main reason. On the demand side, the rapid recovery of consumer demand in developed countries and investment demand in China is an important factor driving the increase in commodity prices. On the supply side, the pandemic has brought a blow to some raw material producing countries such as Brazil and Chile and hit the global supply chain, rendering commodity prices more sensitive to changes in demand.

Additionally, some experts pointed out that the loose monetary policy adopted by developed countries has provided ample liquidity to the global financial market and partly contributed to the increase in commodity prices.

Concerning the impact on the downstream industries, it is generally agreed that though commodity prices have risen sharply, the price hike may not push through to downstream industries because domestic demand has not returned to the pre-pandemic level and the inflation expectation has remained stable. As long as no significant increase is seen in inflation expectation, there is no need to adjust the monetary policy at this stage.

However, although there is no imminent inflation pressure, several factors can push up inflation in the long run –

First, investment in the production of raw materials has declined in the past decade globally. As a consequence, commodity prices can rapidly go up but can hardly fall due to supply shortage. Second, developed countries have become more tolerant of higher inflation, e.g. 3% or even higher. While Japan and Europe have long taken stimulating inflation as a goal of their monetary policy, the Fed has also taken on this path since the outbreak of pandemic. Third, the ongoing low-carbon transition means that the price of carbon will be made more explicit in commodity prices and reflected in the prices of final products.

How to respond to the challenge of rising inflation in the medium and long term? According to the experts, the following should be taken into consideration -

First, stay calm in the face of price changes, and let the price mechanism play its role in optimizing resource allocation. Higher commodity prices will force downstream enterprises to upgrade their technology to reduce cost, and inefficient and unprofitable ones will have to leave the market. To enable this process, the commodity futures market should be developed and free entry and exit of firms and labor should be allowed.

Second, re-examine the medium to long-term inflation targets. As discussed above, underinvestment in raw materials production and the adjustment of monetary policy framework in Europe and the United States mean that the global inflation level may be systemically elevated in the medium and long term. At the same time, as carbon prices are increasingly reflected in commodity prices, it will also exert an impact on the long-term inflation level. Therefore, it is essential for China’s monetary authority to reassess its tolerance of inflation and set new targeted levels.

Third, allow RMB to appreciate under a market-based exchange rate mechanism and let the exchange rate play its role in adjusting domestic and external demand. RMB appreciation will boost domestic demand and import, which is conducive to the development of the new dual-circulation paradigm.

Fourth, monitor changes of inflation expectation closely and strengthen communication with the market in the face of rising inflation risks. Increase efficiency of communication and avoid direct intervention at an early stage.

Fifth, reduce administrative intervention on commodity supply and be flexible with certain commodities. For example, controlling the production of high-carbon commodities such as copper and aluminum by administrative orders may directly reduce carbon emission in the short run. However, this will also push up prices of such commodities and increase the costs of green investment, which may hurt carbon-neutrality effort in the long run.

The seminar was moderated by Mr. Li Bin.