Automotive component industry suffers from imported inflation

In recent days, “inflation” has become a hot topic for the majority of netizens. In fact, there have been allegations such as “inflation” and “inflation expectations” since the beginning of this year. In our daily lives, what we feel more obvious is what these ridiculous online vocabulary manifests, such as: “Spicy you,” “Beans, you play,” “Ginger, your army,” “Gao Gaozong,” and so on. Everyday life can be said to be "up", but ordinary people are even more shy. Houses have bubbles (usually buying a house is a good way to resist inflation), gold can't afford it, and in the inflationary years when prices are soaring, even the parts that are expensive for the auto industry are not spared.

What are the reasons that lead to the input inflation of China's auto parts?

As we all know, there are three major drivers of rising prices, hot money speculation, inflation of imported commodity prices, and the proliferation of global capital flows. Judging from the current situation of China's auto and parts industry, it is mainly input-type inflation, and the future capital mobility will continue to increase.

Input-type inflation means that the root cause of inflation is not endogenous in a country's market, but because foreign inflation occurs in the form of international trade and is conducted into the country. For China, inflation is mainly transmitted by the United States. There are two main ways: one is through the rising input of raw material prices, and the other is through the input of capital flows.

1. Increment of Commodity Prices Input Type Inflation We know that the raw materials needed for auto parts production in China are met through both domestic production and foreign import. If the price of raw materials imported from abroad rises, it will push up the prices of domestic related products. We have seen that at present, the rise in the prices of other commodities, such as oil and steel, occurs in the context of the depreciation of the US dollar. In other words, because the depreciation of the US dollar lowers its purchasing power, it needs more U.S. dollars to reach the previous level. The purchasing power, that is to say the price increase, however, in order to ensure the price competitiveness of export commodities, China keeps the exchange rate of RMB and US dollar fixed at a very small extent. Therefore, when the depreciation of the US dollar causes commodity prices to rise, due to the current RMB exchange rate. The appreciation has not been able to hedge against the depreciation of the dollar, and the price of these raw materials denominated in renminbi has risen at the same time, which has directly caused the rise in rubber and steel prices.

2. The spread of global capital mobility The second route to inflation input is through capital flows. In recent years, China’s automobile industry has grown at a rapid rate and foreign exchange reserves have greatly increased. Some of these are foreign exchange earnings for exporting enterprises and other sectors. At the same time, there is a huge part of the inflow of foreign speculative capital, which is what we call hot money, because of the emergence of the United States. Inflation is caused by the Fed's spamming of currencies, and therefore it has sufficient liquidity in the United States, and liquidity needs appreciation opportunities. China’s current loose monetary policy and the “blowout period” of the automobile industry have become international. The goal of speculative capital is that these speculative capitals will not engage in long-term investment in China, so they will always flock to the capital market and real estate market. Coupled with the introduction and support of recent national policies, this just explains why cars, parts and new energy are particularly active in the securities market. After China’s domestic securities prices escalated under their lead, hot money withdrew from huge income, and the final pay was to the Chinese people at the bottom of society.

In the face of input inflation that cannot be stopped, the search for alternatives to raw materials in theory cannot be resolved in a short period of time, and it will not work. Different raw materials may have a great influence on the quality of the product. In the long run, it is necessary to reduce the dependence on foreign materials. In terms of foreign trade, individuals cannot counterbalance imported inflation, but they can make appropriate preparations in advance to prevent companies from getting into trouble, once again focus on a stable domestic market, continue to develop and seize the domestic market, and reduce the dependence on foreign markets. In the face of exchange rate risks, some hedged exchange rate financial instruments can be used to lock in profits, and the buyer is required to settle in RMB or a currency with a relatively stable exchange rate with the RMB. At the same time concerned about product upgrades to enhance the premium ability. As the government should also consider giving companies appropriate tax incentives to help them tide over this difficulty.