TS Lombard with the note:
Beijing is concerned about the impact of higher commodity prices on the Chinese economy and the possibility of cost-push inflation raising CPI. However, for the first time in over 20 years the driver of the commodity cycle is not China. Central authorities view DM stimulus and Covid-19-related supply shocks as the main cause of higher prices. These are new drivers and they need a new policy reaction function. Instead of tightening, the PBoC is holding a neutral stance: we expect the authorities to keep TSF growth and interbank rates stable to offset the demand destruction impact of higher prices.The next stage of policy normalization will be financial sector de-risking.
China is taking a two track approach to the inflation battle. The first track combats speculative behaviour in onshore markets and improves supply. SinceMarch, the central authorities have ramped up administrative and political efforts to halt price gains. The latest measures include sales of metals from strategic reserves for the first time since 2011. But these moves are insufficient to alter supply and demand fundamentals; for instance total projected reserve sales of copper and aluminium are, respectively, just 2% and 1.6% of annual production. Nevertheless, they have successfully taken some of the speculative heat out of the market.
