China And Inflation

By John Richardson

MUCH excitement heralded the announcement that February inflation in China had fallen to a 20-month low of 3.2 percent – well within the government’s annualised target of 4 percent.

This led to the belief that the government would boost bank lending, and maybe further low bank-reserve requirements and interest rates. No doubt this idea will gain further traction if March inflation is also below Beijing’s full-year target.

But a senior polyolefin industry source said last week: “Although the overall inflation rate has fallen to 3.2 percent, this is very misleading as it doesn’t reflect conversations we are holding with our customers.

“If you go to any plastics processor in China they will tell you the same thing – that real inflation is more like 8-9 percent per year as a result of double-digit increases in food prices.

“The main reason why the overall inflation rate has fallen is because the government follows the Western model in calculating property prices as part of inflation. Property prices have fallen by around 10 percent over the last year.”

The price of pork, a very important staple food in China, still rose by 15.9 percent in February.

Arthur Kroeber, editor of the China Economic Quarterly, wrote in the Q1 edition of the publication: “While inflation is clearly falling and is not an immediate threat, policy makers are still concerned – correctly, in our view – about future inflationary pressures from rising wages and delayed adjustments to resource prices.

“And as we have repeatedly argued, the rapid build up of debt over the last two years has increased risk to the financial sector. Bringing down overall debt levels from their peak of 200 percent of GDP (gross domestic product) in 2010 would be prudent, and give China more room to respond to future problems.”

Rising resource prices, particularly crude oil, represent a major threat to a country which remains poor by Western standards.

Expensive oil hurts poor countries more than rich countries, as a bigger proportion of incomes are spent on food in these more-deprived nations. The cost of food rises as oil gets more costly, due to higher transportation and packaging costs etc.

And as Paul Hodges points out, despite heavy government fuel-price subsidies, China’s diesel and gasoline prices recently reached record-high levels.  

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