China sees fatal twist to inflation debate
Monday, 19 November 2007
Geoff Dyer, FT Syndication Service
SHANGHAI: A Tesco supermarket in a suburb of Shanghai announced late last month it would sell 3,000 bottles of cooking oil at half price. Hundreds queued and when the doors opened, there was a stampede. Nineteen people, most of them housewives, needed hospital treatment.
The cooking oil incident was one of several that have broken out across China in recent weeks. In the most serious, three people were trampled to death in the second week of this month in the western city of Chongqing after a Carrefour store offered a 20 per cent discount on five-litre bottles of rapeseed oil.
The stampedes are the latest twist in China's continuing debate about inflation. Chinese shoppers are more alert than most to a bargain and they tend to bulk-buy goods such as cooking oil that have seen big price increases, when they believe they are about to witness a prolonged bout of inflation.
"It could be another sign of rising inflationary expectations among consumers," said Wang Qing, an economist at Morgan Stanley.
Chinese inflation started to become an issue over the summer when rising costs of pork -- the result of disease -- contributed to a surge in prices. The consumer price index hit an 11-year high in August of 6.5 per cent.
However, some of those concerns abated in September when both pork prices and the consumer inflation rate dropped back.
The inflation debate is starting to gather momentum again. With food prices on the rise again, October's inflation rate is expected to increase once more.
Chinese media have reported it could go as high as 6.7 per cent. Moreover, the government has increased fuel prices by 10 per cent and might be forced into further hikes amid continued reports of fuel shortages.
At a time of global concerns about inflation and signs of a sharp slowdown in the US economy, China's inflation rate is being closely watched as an indicator of whether the economy might be overheating.
A new surge in consumer prices will provide further support for the group of economists who believe the government is facing a serious inflation problem. In one of the most pessimistic analyses of the current situation, Albert Keidel at the Carnegie Endowment in Washington DC warned last month that China appeared to be in a similar situation to the period before the "inflationary catastrophes" of 1988-89 - a prelude to the Tiananmen Square turmoil - and 1993-96.
High food prices could also soon feed into rising wages and a broader inflationary surge. The interest rate rises and other corrective measures needed to restrain inflation could lead to a significant interruption in growth and, potentially, protests. "Without quick steps to dramatically raise effective deposit rates or index them to future inflation, moderate price rises could lead to an inflation crisis," he wrote.
His pessimism is shared by some in Beijing. According to one leading economist at a government think-tank, who asked not to be named, the authorities are at risk of losing control of inflationary expectations. Moreover, as inflation is now higher than the interest rate offered on bank deposits, many people were shifting their savings into the stockmarket, adding to the bubble there.
"It will need a big increase in interest rates to encourage people to hold money again," he said.
Yet the majority of economists remain relaxed about the inflationary risks China is facing.
"The stampede in Chongqing is one of a few isolated cases," says Li Daokui, economics professor at Tsinghua University in Beijing. "We do not believe this means consumers' expectations are about to push the inflation rate higher."
SHANGHAI: A Tesco supermarket in a suburb of Shanghai announced late last month it would sell 3,000 bottles of cooking oil at half price. Hundreds queued and when the doors opened, there was a stampede. Nineteen people, most of them housewives, needed hospital treatment.
The cooking oil incident was one of several that have broken out across China in recent weeks. In the most serious, three people were trampled to death in the second week of this month in the western city of Chongqing after a Carrefour store offered a 20 per cent discount on five-litre bottles of rapeseed oil.
The stampedes are the latest twist in China's continuing debate about inflation. Chinese shoppers are more alert than most to a bargain and they tend to bulk-buy goods such as cooking oil that have seen big price increases, when they believe they are about to witness a prolonged bout of inflation.
"It could be another sign of rising inflationary expectations among consumers," said Wang Qing, an economist at Morgan Stanley.
Chinese inflation started to become an issue over the summer when rising costs of pork -- the result of disease -- contributed to a surge in prices. The consumer price index hit an 11-year high in August of 6.5 per cent.
However, some of those concerns abated in September when both pork prices and the consumer inflation rate dropped back.
The inflation debate is starting to gather momentum again. With food prices on the rise again, October's inflation rate is expected to increase once more.
Chinese media have reported it could go as high as 6.7 per cent. Moreover, the government has increased fuel prices by 10 per cent and might be forced into further hikes amid continued reports of fuel shortages.
At a time of global concerns about inflation and signs of a sharp slowdown in the US economy, China's inflation rate is being closely watched as an indicator of whether the economy might be overheating.
A new surge in consumer prices will provide further support for the group of economists who believe the government is facing a serious inflation problem. In one of the most pessimistic analyses of the current situation, Albert Keidel at the Carnegie Endowment in Washington DC warned last month that China appeared to be in a similar situation to the period before the "inflationary catastrophes" of 1988-89 - a prelude to the Tiananmen Square turmoil - and 1993-96.
High food prices could also soon feed into rising wages and a broader inflationary surge. The interest rate rises and other corrective measures needed to restrain inflation could lead to a significant interruption in growth and, potentially, protests. "Without quick steps to dramatically raise effective deposit rates or index them to future inflation, moderate price rises could lead to an inflation crisis," he wrote.
His pessimism is shared by some in Beijing. According to one leading economist at a government think-tank, who asked not to be named, the authorities are at risk of losing control of inflationary expectations. Moreover, as inflation is now higher than the interest rate offered on bank deposits, many people were shifting their savings into the stockmarket, adding to the bubble there.
"It will need a big increase in interest rates to encourage people to hold money again," he said.
Yet the majority of economists remain relaxed about the inflationary risks China is facing.
"The stampede in Chongqing is one of a few isolated cases," says Li Daokui, economics professor at Tsinghua University in Beijing. "We do not believe this means consumers' expectations are about to push the inflation rate higher."