x Abu Dhabi, UAEWednesday 17 January 2018

Inflation on the march as China rises

Beijing officials start taking measures to keep the Chinese economy from overheating as prices start to soar.

From food and goods to labour and interest rates, prices for both consumers and businesses are on the rise in China.
From food and goods to labour and interest rates, prices for both consumers and businesses are on the rise in China.

Ma Jiaqi, a retired postal worker who lives in Beijing, cannot believe the cost of garlic these days. He describes it as "unimaginable".

A kilo of the vegetable costs as much as 16 yuan (Dh8.85), more than double the price six months ago. But then, the prices of other key foodstuffs in China have also climbed dramatically this year.

For those like Mr Ma, who lives on a modest pension of 2,700 yuan per month, there is a simple solution - going without.

"You make do with less garlic and fewer vegetables," he said. "You just forget about them."

It is not just basic food items that are rising in price. With northern China starting to experience the chill of winter, the jump in the cost of warm coats is a concern to Ying Yuzhu, 20, a pharmacy worker.

"Coats without a brand cost about 150 yuan last year, but now it's more than 200 yuan," she said. "It's the same with shoes."

The price rises, which in the food category reached an annual rate of 10.1 per cent last month, have caused such alarm that the central government has moved to control them.

The country's cabinet, the State Council, has told local authorities to increase agricultural production and guarantee stable fuel supplies. From next month, vehicles transporting produce will be exempt from road tolls. There has also been a clampdown on speculation in commodities such as cotton.

Officials are under no illusions about the importance of stemming inflation. In an online discussion in February reported by Reuters, Wen Jiabao, the premier, said there were two problems that could "threaten social stability and even the steadiness of the government".

"One is corruption, and the other is prices," he said.

Amid the rampant price rises, there was a glimmer of good news last week. Figures released by the official Xinhua news agency showed the cost of key vegetables had stabilised.

Bala Ramasamy, a professor of economics at Shanghai's China Europe International Business School, sees the price rises as largely the product of factors involving this year's harvest. The increases, he says, have "quite a lot to do with the supply side".

This is not the first time in recent years that prices in China have jumped;similar large increases took place three years ago.

"I think some bad weather conditions and so on, that contributes quite a bit to the increase in prices," he said.

But many think the rise in the cost of basic food items is symptomatic of a wider overheating in the economy, illustrated by factors such as soaring property prices.

"People who see food prices as the cause [of inflation] are mistaking cause and effect," said Tom Miller of Dragonomics.

"The underlying cause is more structural conditions in the Chinese economy. The major one is that wages are rising, and they will continue to rise over the next decade. That's because there are labour constraints."

These labour constraints are the product of there being fewer young people available to enter the workforce. The labour shortages manifested themselves this year in a summer of industrial unrest and wage rises in China's manufacturing belt, and many provinces increased minimum wages.

A second factor cited by Mr Miller is the "massive monetary influx" the Chinese economy has seen. The word massive is no exaggeration - last year, loans totalling a record 9.59 trillion yuan were issued.

"The economy is awash with cash. If that happens, you will have inflationary pressure," he says.

Some officials have looked outside China for an explanation. Hu Xiaolian, the deputy governor of the People's Bank of China, the central bank, suggested that quantitative easing in the US was one of several factors causing inflationary pressure in China.

"The speed of Chinese economic growth continues, overseas trade and foreign capital have returned with growth, and expectations of a [yuan] revaluation continue to grow," she said in widely reported comments posted on the bank's website.

Mr Miller dismisses the quantitative easing hypothesis as "complete rubbish".

Whatever the causes, with the consumer price index having jumped 4.4 per cent last month compared with a year ago, exceeding the 3 per cent target, it is no surprise the authorities are taking action.

Last month, the central bank increased interest rates for the first time in nearly three years. And to restrict access to credit, bank reserve requirements were recently increased, for the fifth time this year - this time from 17.5 per cent to 18 per cent.

Even so, the country seems likely to exceed its target of 7.5tn yuan of new loans this year.

Despite the measures, Mr Miller believes China's rapid price rises are here to stay. While in the past decade inflation rates commonly hovered around the 2 per cent mark, he says this was a consequence of "an endless supply of labour".

Now the labour market is tightening, and with wages rising significantly, inflation will remain high, he predicts.

"In the medium to long term we'll have higher inflation," he says. "We're looking at 4 per cent, maybe 5 per cent."

When food and energy are removed from the calculation, inflation is only about 1.6 per cent, and some analysts have said this indicates China's inflation issues are not too deep-rooted.

Either way, the fact that wages are also increasing may explain why some consumers do not find the price rises too much of a worry.

Zhe Xin, a 29-year-old travel agent, insists he can cope with rice going up from about 2.6 yuan a kilo to about 3 yuan. Another of his favourites, instant noodles, has also jumped in price.

"A few weeks ago they were about 1.8 yuan per pack. Now it's about 2.3 yuan per pack," he said. "But I think the prices are still tolerable."