Impact of China inflation spurs concern
Thursday, 19 July 2007
Richard McGregor
LIKE tens of millions of shoppers across China, Zhou Benqi has had to change her buying habits to cope with sharply rising prices of pork and eggs, staple foods for any Chinese family.
"Because of price hikes, an ordinary meal is a big constraint on us, as my pension has already been eaten into by fees for electricity, water, broadband, gas and so on," said Ms Zhou, a 53-year-old Shanghai native. "We've seen officials talking about adjustment many times, but so far they have failed to control prices."
The spike in food prices, about a third of China's consumer price index basket, pushed inflation to a 27-month high in May of 3.4 per cent. Many China economists expect the rate to hit 4.0 to 5.0 per cent soon and will be closely watching the expected release of June CPI data alongside second-quarter gross domestic product figures.
In a country with a high savings rate and raw memories of past political upheavals triggered by sharp price rises, officials watch the inflation rate warily.
So too do business leaders and central banks around the world. China's pivotal position in global supply chains for many products makes higher local prices a global concern.
In the short term, Chinese inflation has been driven by a combination of higher corn prices, which pushed up the cost of feed, and a shortage of pigs owing to the loss to disease of millions last year.
Such factors may be merely cyclical, or one-off occurrences, quickly rectified by farmers rushing more pigs to market, which would bring prices down.
However, a range of other factors has prompted a debate on broader inflationary pressures in China and what that may mean for everything from European consumers to US interest rates.
Jing Ulrich, of JPMorgan in Hong Kong, believes higher farm prices in China have become "structural" rather than cyclical because of declining stocks of arable land and water problems.
On top of that, local manufacturers, who have long struggled to pass on the cost of higher wages and raw materials, are gaining pricing power. "China's days of exporting deflation are coming to an end," she says.
Similar predictions were made as early as 2004 and again in 2006, but huge rises in productivity, which wiped out the impact of wage increases, and overcapacity proved doomsayers wrong.
By this year, however, the easy productivity gains have appeared to be coming to an end. In the last few quarters, wage rises have started to outstrip rises in productivity for the first time in years.
Costs are also coming under renewed pressure from different quarters, most notably a central government determined that industry should bear the true cost of managing the environment and acquiring land.
For years, Chinese industry, usually with official backing, spurned directives from Beijing on the environment that would have hindered their growth plans.
But Wen Jiabao, China's premier, has made it clear that Beijing will no longer tolerate such blatant violations of central diktats, bringing a showdown on the environment closer.
Inflationary pressures are also coming from a more traditional source, an accelerating economy "already running above its potential", according to Hong Liang, of Goldman Sachs.
"Such above-trend growth in aggregate demand will translate into heightened supply constraints, such as in the power and transportation sectors, and inflation," she says.
But while the cost of Chinese goods is clearly moving "from deflation to inflation", according to Jonathan Anderson of UBS, China's impact on resource prices is moving in the opposite direction. "Once we take all the avenues for China to affect global prices into account, we just don't see a clear, positive contribution to aggregate global inflation at present," he says.
The government is expected to respond to rising inflation with one or possibly two interest rates rises and a cut in the tax imposed on interest earnings from bank deposits. However, many central government leaders will be reluctant to lift rates because of the pressure it will place on borrowers, and also for fear it will spur further capital inflows from speculators looking to profit from a rising currency. In addition, not all economists are convinced by the inflation story.
Yiping Huang, of Citigroup in Hong Kong, maintains that China "is still a disinflationary force" and that export prices have been rising because the quality of products sold overseas is improving.
In the long-run, China might become a key contributor to global inflation in a number of ways, Mr Huang says, but "none of these is happening now or will happen anytime soon."
..........................................
— FT Syndication Service
LIKE tens of millions of shoppers across China, Zhou Benqi has had to change her buying habits to cope with sharply rising prices of pork and eggs, staple foods for any Chinese family.
"Because of price hikes, an ordinary meal is a big constraint on us, as my pension has already been eaten into by fees for electricity, water, broadband, gas and so on," said Ms Zhou, a 53-year-old Shanghai native. "We've seen officials talking about adjustment many times, but so far they have failed to control prices."
The spike in food prices, about a third of China's consumer price index basket, pushed inflation to a 27-month high in May of 3.4 per cent. Many China economists expect the rate to hit 4.0 to 5.0 per cent soon and will be closely watching the expected release of June CPI data alongside second-quarter gross domestic product figures.
In a country with a high savings rate and raw memories of past political upheavals triggered by sharp price rises, officials watch the inflation rate warily.
So too do business leaders and central banks around the world. China's pivotal position in global supply chains for many products makes higher local prices a global concern.
In the short term, Chinese inflation has been driven by a combination of higher corn prices, which pushed up the cost of feed, and a shortage of pigs owing to the loss to disease of millions last year.
Such factors may be merely cyclical, or one-off occurrences, quickly rectified by farmers rushing more pigs to market, which would bring prices down.
However, a range of other factors has prompted a debate on broader inflationary pressures in China and what that may mean for everything from European consumers to US interest rates.
Jing Ulrich, of JPMorgan in Hong Kong, believes higher farm prices in China have become "structural" rather than cyclical because of declining stocks of arable land and water problems.
On top of that, local manufacturers, who have long struggled to pass on the cost of higher wages and raw materials, are gaining pricing power. "China's days of exporting deflation are coming to an end," she says.
Similar predictions were made as early as 2004 and again in 2006, but huge rises in productivity, which wiped out the impact of wage increases, and overcapacity proved doomsayers wrong.
By this year, however, the easy productivity gains have appeared to be coming to an end. In the last few quarters, wage rises have started to outstrip rises in productivity for the first time in years.
Costs are also coming under renewed pressure from different quarters, most notably a central government determined that industry should bear the true cost of managing the environment and acquiring land.
For years, Chinese industry, usually with official backing, spurned directives from Beijing on the environment that would have hindered their growth plans.
But Wen Jiabao, China's premier, has made it clear that Beijing will no longer tolerate such blatant violations of central diktats, bringing a showdown on the environment closer.
Inflationary pressures are also coming from a more traditional source, an accelerating economy "already running above its potential", according to Hong Liang, of Goldman Sachs.
"Such above-trend growth in aggregate demand will translate into heightened supply constraints, such as in the power and transportation sectors, and inflation," she says.
But while the cost of Chinese goods is clearly moving "from deflation to inflation", according to Jonathan Anderson of UBS, China's impact on resource prices is moving in the opposite direction. "Once we take all the avenues for China to affect global prices into account, we just don't see a clear, positive contribution to aggregate global inflation at present," he says.
The government is expected to respond to rising inflation with one or possibly two interest rates rises and a cut in the tax imposed on interest earnings from bank deposits. However, many central government leaders will be reluctant to lift rates because of the pressure it will place on borrowers, and also for fear it will spur further capital inflows from speculators looking to profit from a rising currency. In addition, not all economists are convinced by the inflation story.
Yiping Huang, of Citigroup in Hong Kong, maintains that China "is still a disinflationary force" and that export prices have been rising because the quality of products sold overseas is improving.
In the long-run, China might become a key contributor to global inflation in a number of ways, Mr Huang says, but "none of these is happening now or will happen anytime soon."
..........................................
— FT Syndication Service