HONG KONG - The Chinese government now appears to see inflation as public enemy
No 1 as it continues to take various measures to curb price increases with an
eye to recent history that shows public discontent can soon grow to crisis
proportions if the cost of daily necessities gets out of hand.
Steep inflation - 18.5% in 1988 rising to more than 25% in 1989 - was one
reason people joined the 1989 student-led demonstrations at Tiananmen Square
that ended with the bloody June 4 crackdown.
In the most recent inflationary period, mainland residents can buy only half
the portion of basic necessities such as pork they
bought previously with the same amount of money, as their income fails to go up
proportionally.
"If I lived alone, I would stay away from meat shops. But for the sake of my
family, I am forced to buy pork," a retired film projectionist named Yu
who lives in Yunfu city, in southern Guangdong province, said on the phone.
The 70-year-old man has a clear picture of how prices of the country’s major
foodstuffs have risen sharply in recent months.
"The price of pork has jumped to 18 yuan (US$2.50) per kilogram these days
from 12 yuan in September, price of peanut oil has almost doubled to 13 yuan
a kilogram from 7 yuan and even a pack of 250 ml milk has increased to 2.5
yuan from 2 yuan," Yu said. "Now I buy more chicken instead [of pork] as its price
has gone down recently."
Yu is unlikely to take to the streets in protest at his rising food bill.
Younger folk with growing families, students disillusioned with other aspects
of life in China and workers getting by on limited wages might be less
restrained as their already tight budgets come under pressure.
Yi Xianrong, economist of the Chinese Academy of Social Sciences (CASS), said
Beijing recognizes the danger that an economic problem can turn into a
political and social issue.
According to a report by the Hong Kong-based Information Center for Human
Rights & Democracy, more than 1,000 workers at the Sinopec Qilu
Petrochemical Company in Zibo, in the northern province of Shandong have staged
a sit-in protest since December 3 to demand a pay rise to cope with rising food
prices. The center did not say whether the company was negotiating with
workers.
The price rise of the country’s major foodstuffs can be traced back to May last
year, when pork prices doubled in only three months.
In early September, the price of pork and other basics eased a bit after the
government had encouraged farmers to raise more pigs by making efforts to
guarantee their incomes and benefits. Farmers had been reluctant to raise more
pigs partly because an outbreak of blue ear disease had killed according to
some reports more than 70,000 animals. Xue Liang, spokesman of the Ministry of
Agriculture, said on August 23 that officials seeking to curb spread of the
disease had destroyed a further 175,000 pigs. The government said in November
it had brought the outbreak under control.
The outbreak came amid increasing demand for meat by a population benefiting
from the country's growing economy. The average Chinese consumed 39.6 kilograms
of pork in 2006, almost double the 20kg consumed per person in 1990. The pork
market increased about fourfold to 25 million tons from 6.2 million tons during
the period, according to China Meat Association data.
Despite increased supplies, China now also faces the prospect of further
increases in living costs as global prices of crude oil and food surge. Prices
of the country’s foodstuffs, which carry a 33% weight in the country’s consumer
price index (CPI), rose 18.2% in November from a year earlier, pushing the CPI
up 6.9% that month, the fastest pace since December 1996. Utility prices
including water and electricity rose 5.6% year-on-year in the same month.
Compared with November, prices of major food, including refined grain, edible
oil and pork, continued to rise in December, the National Development and
Reform Commission (NDRC), China’s top planning agency, said in a statement
posted on its website on January 9. December CPI data will be released on
January 25.
Full-year inflation in 2007 could be 4.8%, according to Wang Tao, the head of
economic and strategy for Greater China at Bank of America. The China Academy
of Social Sciences (CASS) has forecast a 4.5% increase. CASS, a central
government think-tank, said on January 11 the CPI could rise to 5.8% if the
government fails to work out effective control policies.
The government among other measures raised interest rates six times last year.
Most recently, on January 13 it increased the maximum fine for companies that
collaborate on prices to manipulate the market or disobey government-ordered
price freezes to one million yuan from 300,000 yuan, effective immediately.
The revision to a 1999 regulation came after a State Council, or cabinet,
executive meeting presided over by Premier Wen Jiabao on January 9, which said
it would not allow the prices of fuel, gas, electricity, tap water, heating,
public transportation and entrance tickets to tourist destinations to be raised
in the near future.
To implement the new policy, the NDRC on January 16 initiated price controls on
a package of products, including grain, edible oil, meat, milk, eggs and
liquefied petroleum gas, after increases in price the soybean oil climbed 58%
and lamb 51% in the first half of this month from a year ago.
The continued intervention in the market to curb price increases for daily
necessities has raised concern that prices will go up even more sharply when
the temporary measures end.
The measures have "aroused worries among financial industry players that their
biggest concern for this year was not the overheating economy nor external
economic challenges triggered by US subprime problem, but policy lapse," (ie
expiry of the price restrictions), said Bei Duoguang, managing director of
China International Capital Corporation.
Bei also expressed worries over "the sudden measures" announced by the State
Council, saying this was the first time the government has adopted price
intervention measures since 1993. The administrative measures "should be used
only when financial and monetary policies cease to be effective," he said.
The recent administrative measures might indicate that monetary polices were
losing their usefulness. "Though the combined force of monetary and
administrative means has an immediate effect, it will have serious negative
impact in the long term," he said. "China exports will be boosted by the
unfairly low prices of resources, which will create a negative impact on
China's resources and environment."
Yi Xianrong, a senior economist and finance professor with the CASS, rejected
the suggestion that the temporary price intervention indicated that the
macro-economic control measures were losing efficacy. They had, however,
distorted the relationship between demand and supply, which could later
contribute to an upsurge in the prices of basics and have a bigger negative
impact on the society, he said.
Yu Chuxing, manager of an art institution in Guangzhou, capital of Guangdong
province, said efforts to stabilize market prices are certainly welcome by
consumers, particularly those who have no stable jobs or were low-income
migrant workers. But he echoed Yi’s concerns that prices would surge once the
administrative curbs were no longer in force.
Credit Suisse chief economist Dong Tao said in a research note that given a
freeze on prices of energy, utilities and other public services, the CPI in
December likely moderated towards 6% year-on-year, compared with 6.9% in
November. That, however, would almost entirely be due to the higher price
increases seen the previous year, with CPI gaining 2.8% year-on-year in
December 2006, from 1.9% in the previous month.
"We do not think the moderation in year-on-year CPI indicates any easing in
inflation in China,'' he said. "We expect food inflation to stabilize at around
6-9% year-on-year over the first half of 2008, but with nonfood inflation
picking up."
The first casualty of the Beijing’s decision to intervene to halt rising prices
was mainland energy and food shares, with oil, fertilizer and power stocks
falling sharply.
For example, on January 10, the day after the State council meeting, declining
Hong Kong-listed stocks included China Petroleum & Chemical Corp (Sinopec),
which fell as much as 8.5% before ending 6.43% lower at HK$10.76; fertilizer
maker China BlueChemical, down 6.85% to HK$5.44, and Sinofert Holdings, down
10.21% to HK$7.39.
Jun Ma, chief economist at Deutsche Bank Hong Kong, wrote on January 17 that
mainland food and beverage (F&B) companies such as China Resources and
Lianhua Supermarket Holdings will be negatively affected.
The research note said the bank expected CPI inflation to moderate from 6.9%
year-on-year in November to 6.5% year-on-year in December before rising to
around 7% in January, as food prices continued to increase.
Olivia Chung is a senior Asia Times Online reporter.
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