THE Cantonese dialect is rich in imprecations, which made it all the more
fitting for an inflation commentary by a taxi driver in China’s southern
metropolis of Guangzhou last week. “**** your mother! Vegetable prices are
getting as high as pork! One kilo of vegetables – they’re asking for eight
yuan,” he said. “It’s because we’ve had round-the-clock summer rains. How
can we survive?”
Eight yuan is about 53 pence, quite a lot when the taxi meter starts at just
10 yuan, or 66p, and you have to buy your own petrol.
China may be getting rich, but soaring prices for pork, chicken, beef, fish,
eggs and cooking oils are making many ordinary Chinese feel poorer.
And the cost of living in China’s booming cities is destined to have an impact
around the world. The central bank is raising interest rates to stifle
inflation, reinforcing a global tightening of credit.
The benchmark lending rate was 6.57% last week and the deposit rate was 3.06%,
a negative real rate.
Official inflation reached a 27-month high of 3.4% in May, but the headline
figure masked double-digit rises in foodstuffs.
The price hikes are fuelling demands for higher pay, and with wage rates
already rising at 10% a year, Chinese companies are starting to ask higher
prices for their exports.
Meanwhile, factory owners in the province around Guangzhou told foreign
customers last week that the government has notified all exporters that
export rebates, which can be worth between 6% and 12% of an item’s cost at
the factory gate, will be phased out by the end of 2008.
“It means one simple fact: that the cost of goods from China is going up,”
said a British businessman who sources products in Guangdong province.
That has implications for all the Western economies in which rock-bottom
prices for consumer goods from China have suppressed inflation and kept
borrowing rates low, contributing to buoyant housing markets and surging
asset prices.
But the main concern in Bei-jing is less about Western borrowers than the
political risk that two Chinas emerge – one prosperous as never before, the
other left behind.
A record stock-market rally pumped up a 15% rise in retail sales in May as
people spent 37% more on jewellery and 34% more on cars than they did a year
earlier.
Meanwhile, the cost of China’s staple meat, pork, has soared by some 30%,
making this Year of the Pig a lean one for the vast majority of Chinese who
eke out a living on low wages.
The Communist Party – still, theoretically, the party of the workers – has
resorted to price controls to impose order before discontent gets out of
hand.
That is why official inspectors were traipsing through the rain-drenched
street markets in Chinese coastal cities and arguing with merchants in the
far-flung towns across the agricultural belt in the parched north.
“They posted inspectors to supervise pork prices 24 hours a day and if any
traders started ‘rumour mongering’ or cheating they were threatened with
severe punishment,” said a Chinese financial reporter who watched the
crackdown.
It was old-fashioned intervention, supplemented when the authorities released
thousands of pigs, reared as a strategic reserve on state-run farms, into
the wholesale market.
For now, it has worked. Pork prices stabilised, then fell back.
Premier Wen Jiabao told a cabinet meeting last Wednesday that “moderate
tightening” was required to maintain the government’s balancing act between
growth and stability.
“China’s economic problems include rapid growth in industrial production and
the trade surplus, fast investment growth, excessive liquidity, increasing
inflationary pressure and the challenge of energy savings,” the premier
noted.
Bankers and economists say that probably means new orders to Chinese banks to
increase their loan reserves, plus further interest-rate rises. It is a hard
act to balance because China is coining record trade surpluses every month.
In May, after exports went up 28.7%, it recorded a 73%, year-on-year
increase in the surplus to more than £11 billion for the month.
There was added pressure to raise interest rates after statistics last week
showed that industrial output soared 18.1% in May, compared with a year
earlier, exceeding predictions.
Investment in fixed assets such as factories and roads rose by 25% in the
first five months to more than £200 billion.
“The main concern arising from the combination of high liquidity growth and
low interest rates and inflation is that it provides the classic incubation
conditions for asset bubbles,” said Peter Morgan, chief Asia economist at
HSBC in Hong Kong.
China’s economic planners intervened last year with a raft of taxes and
regulations to choke off a property bubble in big cities that was
threatening to ignite populist fury. They met with limited success.
Now the concern is that if inflation exceeds bank-deposit rates, there is
little to deter the nation’s millions of savers from taking a punt on the
stock market, which experts say is a classic bubble.
Shares on the Shanghai and Shenzhen exchanges have doubled in the last year.
Investors have piled back in after the indexes staggered on June 4, when the
government tripled the stamp duty on shares.
Last week, all the major indexes except Shanghai’s B-shares were in positive
territory and the broad-based CSI index has recovered 16% since the
intervention.
The authorities have revealed plans for big Chinese firms that have floated in
Hong Kong – the so-called “red chips” – to sell shares
in mainland markets. They hope this will increase equity supply, mop up
liquidity and decrease wild, speculative swings in smaller firms’ shares.
On Friday, the nation’s third-biggest lender, China Construction Bank,
announced it would sell 9m shares in Shanghai, valued at more than £2.7
billion.
Other red chips that may come to the market are China Mobile, which has the
biggest number of cellphone users in the world, CNOOC, the state
off-shore-oil firm, and Lenovo, the personal-computer maker that bought part
of IBM.
One conundrum for the government is rising domestic demand. Rising incomes,
along with the rapid move of millions of Chinese into cities, are the main
factors driving consumption. The government has also decreed steady
increases in spending on health and education, while it is working to expand
pensions to give people a greater sense of economic security and less need
to put money away for healthcare in old age.
Yet China is a society steeped in memory, and its old people recall how
hyperinflation ravaged their inheritances and robbed the pro-capitalist
Kuo-mintang government of legitimacy, paving the way for the Communist
takeover in 1949.
Rising prices also helped to set off the mass demonstrations across China in
1989.
Premier Wen is famous among Chinese for accompanying his then boss, the party
reformer Zhou Ziyang, in a failed bid to persuade the protesters to leave
Tiananmen Square. He knows that inflation means more than mere statistics.
LEAN YEAR
China’s headline inflation is running at 3.4%.
Pork has risen 30% – it’s a lean Year of the Pig. 1.3bn Chinese ate 90bn lb
of pork in 2006. Food prices push up wage rates 10% a year.
China’s trade surplus was more than £11bn in May alone – up 73% on a year
earlier.
The central bank is joining global moves to tighten credit.
Exports will get dearer. Subsidies will be cut and the currency is rising
slowly.
That may mean slower export growth and rising inflation in the West.
