China’s Capacity Reduction Reform and Its Impact on Producer Prices

IMF Working Papers, September 28, 2018

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China’s Capacity Reduction Reform and Its Impact on Producer Prices

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Bibliographic details

• Authors: Linxi Chen, Ding Ding, Rui Mano
• Published: September 28, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484375914.001

Summary

• In late 2015, the Chinese authorities launched a policy to reduce capacity in the coal and steel industries under the wider effort of Supply-Side Structural Reforms.
• Around the same time, producer price inflation in China started to pick up strongly after being trapped in negative territory for more than fifty consecutive months.
• The paper asks whether the reflation was driven by capacity cuts in coal and steel or by a strengthening of aggregate demand.
• Empirical analyses indicate that a pickup in aggregate demand, possibly due to the government’s stimulus package in 2015-16, was the more important driver.
• Capacity cuts played a role in propping up coal and steel prices, explaining at most 40 percent of their price increase.

Key findings and statistics

• Capacity reduction policy target sectors: coal and steel industries.
• Duration of prior negative producer price inflation: more than fifty consecutive months.
• Maximum contribution of capacity cuts to coal and steel price increase: at most 40 percent.
• Possible primary driver identified: pickup in aggregate demand, possibly due to the government’s stimulus package in 2015-16.

Subject matter and keywords

• Subjects: Economic sectors, Environment, Financial crises, Metal prices, Mining sector, Non-renewable resources, Prices, Producer price indexes, Producer prices.
• Keywords: capacity reduction, China, demand factor, Global, Metal prices, Mining sector, Non-renewable resources, PPI index, PPI inflation, PPI reflation, producer price index, Producer price indexes, Producer prices, steel industry PPI, supply-side structural reforms.

Content in this bundle

• China’s Capacity Reduction Reform and Its Impact on Producer Prices, WP/18/216, September 2018
  • China’s Capacity Reduction Reform and Its Impact on Producer Prices, WP/18/216, September 2018 (Markdown version)
  • China’s Capacity Reduction Reform and Its Impact on Producer Prices, WP/18/216, September 2018 (PDF)