SCIO briefing on China's economic performance in H1 2021
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E-mail China.org.cn, July 22, 2021
Red Star News:
My questions involve two issues. The first is pork prices. According to the press conference this morning, pork prices in China went down by 19.3%. Will the decline cause the prices to be lower than the cost of pig breeding? What's the reason behind the downward trend? What measures should be taken if the prices further drop? Will the country's purchase and storage policies effectively keep the market stable? Second, in the first half of the year, China's PPI went up by 5.1% year-on-year. What's the reason behind the increase? Will this increase lead to higher industrial costs and losses for industrial enterprises? What impact will a high PPI and a low CPI have on the national economy? Will it cause ripple effects to consumer prices? Thank you.
Yao Jingyuan:
Both issues are of great concern to the people. There is an economic law called the cobweb theory. To put it simply, the theory means that the current output of a product determines its current price, which in turn determines its output in the next period. When the current output of a product is large, its price will fall, and so will its output in the next period. The decrease in output will in turn lead to an increasing price.
There has already been much research worldwide about cobweb theory and its application for agricultural products. Over the past decade, we have accumulated numerous positive experience. In the beginning of 2018, there was a rebound in pork prices. According to my research in 2019, each pig can make a profit of 2,000 yuan, and profits can reach 20 million yuan when raising 10,000 hogs. Pork prices have now risen to 80 yuan per kilogram, and the public complains. This is mainly due to the decrease in the supply of pigs, i.e., the number of pigs available for slaughter. In 2019 and 2020, there was a drop in the number of pigs available for slaughter — down by almost a third — resulting in a rise in pork prices. Therefore, people increased their spending on raising pigs, and the number of pigs available for slaughter rose. There were also some other factors in 2019 that affected prices, for example, swine flu. Over the past two years, we have witnessed a rapid recovery in the number of pigs available for slaughter and growing piglet replenishment. At the end of June, pig stocks numbered 439.11 million, recovering to historically normal levels. So pork prices began to decrease. From June to August, the summer months, the decline in meat consumption leads to a drop in pork prices.
You asked about whether the pork prices dropped to the cost price. Indeed, individual pig farmers have already sold pigs at below-cost prices, while large-scale pig breeding farms continue to make profits. We usually take several measures to stabilize pork prices. Besides increasing pig imports, we now put more effort into expanding government reserve purchases. We have already summarized many helpful experiences, and the National Development and Reform Commission is actively working on implementing these measures. Now, pork prices have dropped too sharply. People living in urban areas hope to purchase pork at the lowest possible price. But for farmers and the pig breeding industry, we need to stabilize prices. So the government has taken measures to purchase pork as part of its effort to stabilize the market and prices. In the next round, when the pork prices go up, the government will sell the pork from state reserves at a lower price in a bid to moderate pork prices. We have now accumulated much more experience and this will not be a matter of concern.
As to your second question, the price of upstream raw materials has now risen. China's producer price index (PPI) increased 8.8% year on year in June, the highest level seen over the past few years. Increasing prices in upstream raw materials are due to loose fiscal and monetary policies that the U.S. and some countries have taken. So there has been a rise in the prices of bulk raw materials in the international market, such as oil, steel, and non-ferrous metals. Raw materials have also witnessed rising prices in the international market. China is the world's biggest bulk commodity importer, and the rising prices of raw materials in the international market will surely affect the domestic market through imports. In the domestic market, the downstream manufacturing companies will be most pressured, which will require us to pay more attention to prices in the second half of this year. The rising prices of upstream raw materials such as oil, coal, steel, non-ferrous metals, and chemicals will definitely influence downstream companies, and that's exactly what sparks concerns.
I see that people are worried about how changes in the PPI may affect the CPI (consumer price index), which may eventually lead to growing inflation. I don't think this is a major issue. What concerns us most is that if manufacturing companies find difficulty in moving out and the prices of upstream raw materials can not be stabilized, these companies will face additional difficulties and challenges. I also believe that manufacturers should turn the pressure resulting from soaring prices of upstream raw materials and power resources into driving forces for the innovation and technological advances in companies. However, boosting the capacity for innovation, technological advances, and management doesn't happen overnight. So what measures should we take? In accordance with the deployment and decisions of the CPC Central Committee and the State Council, we will strengthen work to ensure supplies and stabilize the prices of major upstream raw materials and power resources. There is no problem with that, and it is not a matter of concern. According to the guiding principles, since we are committed to peaking carbon emissions and achieving carbon neutrality, to some extent, we don't support expanding steel production. However, once we lift restrictions, there will be a rise in steel production, as well as in coal. Coal prices have recently increased, but prices will stabilize as long as we encourage production and expand production while ensuring supply. We have confidence in our production capacity, and prices will stabilize. China's PPI increased 8.8% year on year in June, down by 0.2 percentage point from May, which is a hard-won achievement. I'm confident that we will stabilize prices in upstream raw materials and maintain a stable trend in the second half of this year. I know many people are worried about inflation. The CPI may edge up during the second half of the year, especially in September, when there is increased meat consumption during the Mid-Autumn Festival and National Day holiday. Even so, CPI growth is expected to stay below 3% throughout the whole year. I suggest that we should now place more focus on easing manufacturing companies' difficulties.
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