China’s Inflation Challenge

By John Richardson

In our third post on the context behind last week’s steep fall in polyolefins prices,and the prospects for a recovery, we look at inflation – one of China’s numerous economic challenges…..I

NFLATION remains a major threat in China, hence the government is unable to make the cuts in interest rates necessary to adequately re-stimulate the economy, said a polyolefin industry source.

“The inflation problem hasn’t gone away,” he added, referring to how, despite the fall in overall inflation to 3.4% in April from 3.6% in March, April food-price inflation was still at a worryingly high 7%.

As we have been pointing out for several months now, and nothing has changed, the government is caught between a rock and a hard place.

If it re-stimulates the economy by too little, then the rest of the world’s economy could be in a lot deeper trouble.

Too much stimulus and this could cause a steep rise in food-price inflation, thus hurting China’s low-paid workers who spend a big proportion of their incomes on food. This would contradict one of the main objectives of the government’s 12th Five-Year-Plan (2011-2015), which is to reduce income inequality.

Plus, even if China were to lower the cost of borrowing and further cut bank-reserve requirements, it might not make much difference, given the weak state of business confidence. Domestic companies, hit by falling exports, higher wage costs, a weakening global economy and uncertainty over the outcome of the October leadership transition, appear to be in no mood to borrow aggressively.

Where do we go from here? Potentially, to a very difficult place when Chinese petrochemicals demand fails to grow at all this year. It might even, in fact, contract.

These were the kind of issues being debated on Wednesday ahead of the Asia Petrochemical Industry Conference (APIC) in Kuala Lumpur, Malaysia, which takes place on Thursday and Friday of this week.

The mood is sombre and anxious and everyone wants to know what on earth has gone wrong with China.

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