Price war

Xi Jinping: attacking US policy

Fighting inflation seems to be one of a diminishing number of objectives that the world’s two biggest economies have in common. For example, one of the less-discussed outcomes from a virtual meeting between Chinese President Xi Jinping and his American counterpart Joe Biden last November was that both countries agreed to tap their strategic oil reserves in efforts to keep a lid on petrol prices.

In trying to tame spiralling inflation for other goods, Washington wants more from Beijing. One priority: pressuring the Chinese into ditching their ‘zero-Covid’ policy, which is being blamed for disrupting global supply chains and stoking price rises.

Beijing looks more concerned about the spike in American interest rates, however. “If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers,” Xi warned at the Davos summit in January, claiming that developing countries would bear the brunt of the impact.

So have the two countries made substantive efforts to address each other’s concerns? No, far from it.

Over the past few months the Chinese government has put the country’s four biggest cities into lengthy lockdowns in a bid to stamp out a resurgence in Covid infections.

The result was a further squeeze in supply chains and inflationary pressures.

The Federal Reserve, of course, has just raised its benchmark interest rate by 75 basis points – the most aggressive hike in nearly three decades.

US consumer prices have been increasing at the fastest pace in 40 years. The consumer price index (CPI) shot up 8.6% in May from a year ago, with Chinese media outlets immediately finding direct fault in Washington’s policies for the inflationary storm.

“The US government has begun to scapegoat other countries for its own policy failures. But it is America’s selfish policies [the Fed’s quantitative easing] and trade war that have caused and perpetuated its inflation. The worst is yet to come,” Xinhua warned in an op-ed.

Chinese inflation rates in May were a lot lower at 2.1%, giving the central bank a little more room to jack up an ailing economy. Policymakers have also been trying to sound confident that they will meet their objectives of capping China’s CPI increase at 3% on an annualised basis. “We have been implementing prudent monetary policy and not printing excessive money in recent years,” Li Keqiang, the country’s premier, explained this week during a visit to Hebei.

But that doesn’t mean that the central bank can sit too easy. Citing a number of economists, Sina Finance reported concerns about China’s potential CPI readings over the remainder of the year, even if they look less intimidating at the moment. On one side there are lingering concerns that inflationary pressures on manufacturers – evident in increases in the producer price index (PPI) – will soon spill over into higher prices for Chinese consumers. Analysts are also concerned that the spike in US rates will trigger unprecedented volatility in stock markets. Should that happen, huge volumes of dollars are likely to flow out of emerging markets, including China, bringing heightened risks of depreciating asset prices.

That’s probably why Xi made the Fed’s monetary policy one of his key concerns during his speech at Davos earlier this year.

China’s president might be dialling up Joe Biden again, after the US president told reporters he is planning to speak to Xi soon. But for the time being the Biden administration seems to be more willing to consider another concession that Beijing has been demanding for a while.

US Treasury Secretary Janet Yellen said on Sunday that some of the tariffs on Chinese imports – inherited from the Trump administration – served “no strategic purpose” and Biden has indicated that he is close to making a decision on easing some of them as part of efforts to bring down prices for American consumers at stores like Walmart.

It will be interesting to see what, if anything, Beijing might bring to the bargaining table in exchange.

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