Producer Price Index in China Rises 8.8%... Signs of Monetary Policy Shift Detected (Comprehensive)

China Producer Price Index at 8.8% and Consumer Price Index at 1.1% Show Wide Gap
Chinese Financial Authorities Take Measures Including Reserve Requirement Ratio and Fee Cuts Amid Economic Slowdown Concerns

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Last month, China's Producer Price Index (PPI) rose 8.8% year-on-year. Although this is lower than the previous month's increase of 9.0%, it remains at a high level.

Amid concerns about a global economic slowdown due to rising international raw material prices and the spread of the COVID-19 Delta variant, signs of change are emerging in the monetary policy stance of China's financial authorities.

China's financial authorities have announced a cut in the reserve requirement ratio (RRR) and are also lowering various financial transaction fees. Reductions in the RRR and fees are monetary policy tools typically used proactively when economic slowdown is a concern.

[Image source=Reuters Yonhap News]

◆ China Steps Up Support for the Real Economy = According to Chinese media including the state-run Xinhua News Agency on the 9th, the People's Bank of China (PBOC) will reduce various handling fees in the financial sector to support small and medium-sized enterprises (SMEs) and revitalize the livelihood economy.

Pan Yifei, Deputy Governor of the PBOC, said at a State Council policy briefing held the previous day, "We discussed appropriate reductions in fees paid by SMEs and ordinary people to banks and other financial institutions," adding, "We will expand monetary policies that allow the fee income of banks and financial institutions to be transferred to the real economy."

The fees to be reduced include bank account service fees, RMB remittance fees, card fees, ATM withdrawal fees, and various billing fees charged by banks and other financial companies.

The PBOC expects that if these fee reduction measures are implemented, they will generate a policy effect worth about 24 billion yuan (approximately 4.25 trillion Korean won) annually, with more than 16 billion yuan benefiting SMEs and self-employed individuals. The PBOC explains that lowering various fees will reduce transaction costs for SMEs, self-employed persons, and individuals, thereby increasing disposable income.

◆ China Expands Lending Capacity for SMEs = On the 7th, the State Council held an executive meeting chaired by Premier Li Keqiang to discuss monetary policy directions, including a cut in the reserve requirement ratio. This marks the first time in 15 months that Chinese financial authorities have used the RRR cut tool. China had previously cut the RRR three times in January, March, and April last year due to the impact of COVID-19.

Although the Chinese economy has been recovering from the COVID-19 shock since the second half of last year, the recent sharp rise in international raw material prices is placing considerable pressure on production and consumption sectors. The RRR cut is a support measure for SMEs struggling with rising international raw material prices. Lowering the RRR increases banks' lending capacity.

Earlier, the PBOC changed the method for calculating deposit interest rates at commercial banks, lowering interest rates on medium- to long-term deposits of one year or more. This change in calculation method has led to an increase in SME loans by commercial banks.

[Image source=Yonhap News]

◆ Monetary Policy Shift Amid Soaring Producer Prices = At the executive meeting, Premier Li Keqiang instructed to expand inclusive financial policies while maintaining a stable monetary policy stance. Chinese financial authorities have repeatedly emphasized that they will not adopt a "d? shu? m?n gu?n" (flood irrigation) approach.

However, abnormal signs are appearing in China's real economy due to the sharp rise in international raw material prices. The Producer Price Index (PPI) is a representative indicator. In May, China's PPI rose 9.0%, the highest level in 13 years since 2008.

The PPI for June, announced by China's National Bureau of Statistics on the same day, also rose 8.8% year-on-year. Although this is 0.2 percentage points lower than in May, it remains high. The Consumer Price Index (CPI) for June increased by only 1.1%. The gap between producer and consumer price indices is very large.

The dominant analysis is that the sharp rise in PPI is due to soaring international raw material prices. Rising raw material prices reduce the profitability of Chinese manufacturing companies. Given that export profitability has already declined due to the strong yuan, concerns about the deterioration of the financial structure of Chinese manufacturing companies are emerging in various places.

Measures by Chinese financial authorities such as RRR and fee reductions and the lowering of long-term deposit interest rates through changes in interest rate calculation methods are all seen as responses reflecting these real economy conditions.

This content was produced with the assistance of AI translation services.