Since the beginning of this year, globalcommodity prices have risen significantly, with the Nanhua industry indexincreasing by about 7 percent as of April 16.

The prices of copper, rebar, iron ore, andcrude oil have all surged by more than 10 percent, and the CRB Spot MarketPrice Index has soared by nearly 15 percent.

Some people worry that if rising commodityprices bring about a new round of inflation, or if the authorities have such aconcern, early tightening of macroeconomic policies may ensue.

With the absence of significant expansionof demand, there is no need to worry that the Producer Price Index, or PPI,rise will trigger a new round of inflation.

Instead, attention should be focused on theeffect of redistribution of corporate profits brought about by the rise of thePPI; and an effective way to improve the cash flow of downstream industriesshould "make the cake bigger" and solve the problem of insufficientaggregate demand.

Even if inflation rises in the future, aslong as such a rise remains moderate, the benefits to the economy will outweighthe negative impacts.

The logic of this round of commodity priceincrease is quite similar to that in 2016, when demand-side structural featurescan provide better explanation.

Hit by the COVID-19 pandemic, the overallperformance of the Chinese economy was similar to that in 2009, having aV-shaped rebound after a rapid bottoming out, and so it was with commodityprices.

However, it is not right to simply draw ananalogy between the ongoing economic recovery and the rise of commodity pricesto that in 2009, and then predict a new round of inflation will occur.

In 2009, driven by the significantexpansion of aggregate demand, goods prices soared and caused inflationarypressure, as reflected in the simultaneous bottoming and peaking of theconsumer price index or CPI and the PPI, and their similar growth rates.

Before 2016, the PPI and the CPI oftenmoved in the same direction in each economic cycle, and the PPI did not have astable and obvious leading role over the CPI.

In the current economic recovery, the CPIand the PPI have diverged significantly. The PPI is on a quick rise, while theCPI and the core CPI are falling rapidly.

The GDP deflator, which can morecomprehensively reflect price changes, has not shown any significant increase.That is to say, even if the Chinese economic rebound lasts four quarters, theactual inflationary pressure will not be heavy.

In short, we don't have enough evidence toshow that the PPI was a leading indicating index over the CPI for the past fiveyears, which means the price transmission mechanism from the production end tothe consumption end is not smooth.

Our calculations showed the rollingcorrelations of the CPI and the PPI in different periods had a great structuralchange in the year 2016.

Before 2016 and except for the periodduring the 2008 Global Financial Crisis, the rolling correlation between thePPI and the CPI was relatively stable－the three-andfive-year rolling correlation coefficients were both around 0.8.

However, after 2016, the three-year rollingcorrelation coefficient slumped rapidly, followed by the rapid decrease of thefive-year rolling correlation coefficient in 2017.

Moreover, different types of commoditieshave shown different price performances during this round of so-calledcommodity price surge.

Since Jan 2, 2020, black-color commodityprice index by Nanhua Futures has surged by 71 percent, followed by nonferrousmetals (27 percent), and agricultural products (10 percent), while energyproducts' price index has declined 5 percent.

Such differences in price performance canbe well explained from supply and demand nonequilibrium.

From the supply side, output of blackcommodity and nonferrous metals has declined due to production disruptionscaused by the pandemic, while the impact on supply of agricultural and energyproducts is not that strong.

Meanwhile, demand for crude oil has shrunk,causing a slide in oil price. Before the official removal of quarantinepolicies by different countries, it is difficult to see a significantimprovement in crude oil demand, and the decline of price of crude oil, whichis the most upstream product in the energy and chemical industry, has created ahuge decline space for the prices of energy and chemical products.

Demand for the black commodities andnonferrous metals, however, is stronger, because it is obvious that investmentis stronger than consumption during this round of economic recovery, and thereal estate industry has the most eye-catching investment performance, which issimilar to that in 2019.

Exports, another important contributor tothe Chinese economic recovery, have also limited impact on agricultural productsdemand.

Such differences can explain to some extentwhy changes in the PPI have not conducted to the CPI, as the prices ofagricultural products and crude oil have stronger correlation with the CPI thanblack commodity and nonferrous metals.

More attention should be paid to theredistribution of corporate profits alongside the industrial chain, while taxand fee reductions have limited effect to deal with surging raw materialprices.

In the past five years, the PPI and the CPIhad a lasting divergence, and there was no evidence to show the PPI hasinfluenced the CPI.

The commodity price surge will mainly causeredistribution of profits alongside the industrial chain, and the upstreamindustry has an increasing share of the total profits.

Also, with the absence of demand expansion,there is no need to worry about the risk of the PPI triggering a new round ofinflation, and more attention should be paid to the effect of redistribution ofcorporate profits brought about by the PPI rise.

Since supply cannot be controlled anddemand cannot be suppressed, some will think of reducing taxes and fees to dealwith the surging commodity price. This approach may reduce the cost pressure ofdownstream enterprises to some extent, but is not as effective as some peoplemay think.

On the one hand, value-added tax reductionscannot improve cash flow of downstream enterprises directly, because benefitsfrom reductions of value-added tax, a turnover tax, will be distributed amongupstream and downstream enterprises, in accordance with a corporate'sbargaining power, and downstream enterprises have weaker bargaining power thanthe upstream ones.

Reducing corporate income tax rate is alsoin conflict with China's fiscal and taxation reform paradigm that focuses ongradually increasing the proportion of direct taxation, although it candirectly improve enterprise incomes.

On the other hand, reductions in tax andfees cause decline in government revenue, which may further aggravate thegrassroots governments' pressure to equate revenues with expenditure, and evenindirectly strengthen their dependence on "land finance"－a fiscalstrategy in which local governments generate revenue through land grantpremiums and land tax revenues.

Based on the analysis above, it can beconcluded that to improve cash flow of downstream industries, the realeffective way is dealing with the problem of insufficient aggregate demand and"making the cake bigger".

China's economy is still recovering, and enterprisesneed time to improve their balance sheets, while the government has fiscalpressure.

A mild inflation will help improve thebalance sheets of enterprises, residents, and the government, as well asincrease aggregate demand. As long as inflation stays within the central bank'starget range for inflation and does not evolve into hyperinflation, thebenefits will outweigh the negative effects.

If support policy for the economic recoveryis withdrawn prematurely, the economy will fall into deflation due toinsufficient aggregate demand, accompanied by a new round of economic slide.

Profits at China's major industrial firmsgrew at a steady pace in the first four months of the year as the country'seconomic recovery gained further momentum, official data showed on Thursday.

China's industrial firms with annualbusiness revenue of at least 20 million yuan ($3.12 million) saw their combinedprofits rise 106 percent on a yearly basis during the January to April periodto 2.59 trillion yuan, according to the National Bureau of Statistics.

The figures represented an annual growth of49.6 percent when compared with 2019, with average growth rate in the past twoyears coming in at 22.3 percent. On a monthly basis, industrial profits rose by57 percent in April to 768.63 billion yuan.

Industrial profits for the manufacturingsector grew by 114 percent on a yearly basis to 2.2 trillion yuan. Overall,industrial profits rose steadily due to the improved demand and lower costs,the NBS said.

According to Zhu Hong, a seniorstatistician at the NBS, profit growth remained steady in most of the sectorson a yearly basis, thereby sustaining the upward growth momentum that begansince the second half of last year.

Profits in the mining sector reached 217.1billion yuan, up 103 percent on a yearly basis. Higher prices for bulkcommodities and improved demand fueled the profit surge in the mining sector,said Zhu.

Equipment manufacturing and high-techmanufacturing also saw improved momentum, while consumer goods manufacturingcontinued its steady recovery, the NBS said.

Zhu said that overall, the performance ofindustrial enterprises remained stable and showed quick recovery during thefour-month period. This is noteworthy, considering that the global COVID-19situation is still complex, the foundation for industrial economic recovery isnot yet solid and the profit growth has been uneven. Some of the consumerindustries are yet to return to the pre-pandemic profit growth levels.

Zhu said that the higher bulk commodityprices increased pressure on the production and operation of midstream anddownstream industries. It is important to ensure steady bulk commodity suppliesand keep the prices stable to consolidate the growth recovery.

Zhu Jing, a senior analyst at the research departmentof Bank of China, said profits of industrial firms will grow at a much fasterpace on the back of steady domestic demand, resilient external demand and thecountry's existing pro-employment policies. However, operating costs mayincrease for most of these enterprises and measures need to be rolled out tomonitor the market changes and increase supply and demand of certain products.

China's inflation is likely to pick up inthe coming months amid rising global commodity prices and recovering domesticdemand, but there is no cause for concern, experts said.

The higher commodity prices are unlikely tospark a sharp surge in consumer prices, given the central bank's prudent policystance and the moderate recovery in domestic demand, they said.

China's consumer price index, a key gaugeof inflation, fell by 0.2 percent on a yearly basis last month compared withthe 0.3 percent decline in January, amid growing demand for cultural andentertainment services during the Spring Festival holiday and rising global oilprices, the National Bureau of Statistics said on Wednesday.

Meanwhile, the producer price index, whichmeasures factory-gate prices, rose to a 27-month high of 1.7 percent on ayearly basis in February, up from 0.3 percent a month earlier, the NBS said.

The stronger-than-expected inflationreadings came after a sustained rally in global commodity prices like oil andcopper triggered expectations of global reflation. This could mean risinginflationary pressure for China, a major importer of energy and commodities.

"China is likely to face higherinflation pressure due to rising global commodity prices, with the CPI and PPIgrowth set to increase this year," said Zhang Liqing, director of theBeijing-based Central University of Finance and Economics' Center forInternational Finance Studies and chief economist of PwC China.

But the risk of imported inflation shouldbe controllable, Zhang said, given the prudent stance of the People's Bank ofChina, the central bank, and the room for it to adjust policies according tothe changes in global commodity prices.

Also, some producers may choose to bear therising commodity costs themselves and refrain from raising prices of theirproducts, alleviating the inflationary pressure felt by consumers, Zhang said.

"The government's projected goal of anaround 3 percent annual growth in the CPI will probably be fulfilled," hesaid, adding that it is still important to monitor global commodity prices andrelated risks.

"The recovery in domestic demand isnot expected to be so strong that high consumer inflation will happen,"said Wu Chaoming, chief economist with Chasing Securities.

Consumer spending will further recover asCOVID-19 gets further controlled, but the process should be gradual andmoderate, as evidenced by the still low core CPI reading last month, Wu said.

The NBS reported that the growth in thecore CPI, which excludes food and energy prices to better reflect the realdemand, has remained low at zero last month, though up from a 0.3 percentdecline in January.

Falling food prices may also help rule outa sharp rise in CPI growth as pork production continues to recover, expertssaid. Food prices dropped by 0.2 percent on a yearly basis last month, versus a1.6 percent rise in January, with pork prices down by 14.9 percent, the NBSsaid.

Lu Ting, Nomura's chief China economist,said the year-on-year PPI growth is expected to peak around the middle of theyear and moderate thereafter with a whole-year growth of 4.2 percent, while theCPI growth may rise throughout the year and see an annual growth of 1.7percent.

Though there have been concerns that therising inflation may pressure the country's central bank to tighten policies,Lu said he expects the PBOC to stick to the "no sharp shift"commitment and roll out neither hikes nor cuts to policy interest rates and thereserve requirement ratio this year.