Inflated trilemma

25 May 2021 By Yawen Chen

Booming commodity prices have put Beijing in a bind. Economic planners are trying to forcibly cap a fierce rally of key industrial ingredients like steel and coal, which is hurting downstream manufacturers. Yet President Xi Jinping’s push to reduce overcapacity and cut emissions has companies slashing output, while property and export sectors keep driving demand.

For China’s traders, this year has been a roller coaster ride. The most-traded iron ore contract for September delivery on China’s Dalian Commodity Exchange, for example, rose over 50% this year to touch a record high on May 12. Then Premier Li Keqiang warned against “unreasonable” gains, and prices fell 20% to around 1,000 yuan per tonne. On Sunday top metals producers were hauled in for a talk. A broader market selloff ensued.

It will be hard to keep the lid on. On top of the global rally underway for items like oil, domestic demand, driven by real estate construction and the export sector, is pushing up consumption of iron ore, steel, coal and copper. That has naturally attracted speculators and generated volatility.

The property issue is particularly tricky. Housing investment has risen 22% in the first four months of 2021 from a year earlier; sales shot up a whopping 48%. This is partly because the central bank, worried about signs of macroeconomic softness, has been forced to keep liquidity conditions accommodative. This has in turn sabotaged its campaign to flatten out real estate values.

The supply side is another problem. Xi has committed to making China achieve carbon neutrality by 2060, and the government has also been trying to close excess capacity. But that has in turn reduced output from coal-producing regions like Inner Mongolia and Shanxi and reduced steel production in Hebei.

Market forces, both inside and outside China, are arrayed against officials. If taming the property market were easy, Beijing would have done it already. They can hardly turn away export orders. But ramping up production to deflate pressure will put climate goals at risk. Something will have to give.


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