Beijing’s Focus on Food Prices Ignores Broader Inflation Risk
China took steps Wednesday to control rising prices at the most basic consumer level. But Beijing faces a severe challenge in preventing higher global commodity prices from igniting broader inflation that could threaten China’s streak of powerful economic growth.
With prices rising this autumn for many commodities like sugar and cotton, the country’s cabinet announced on Wednesday evening that it would impose price controls on food, introduce subsidies for the needy and increase the availability of fuel supplies.
So far, the inflation in consumer goods in China has been largely confined to food and energy, and government policy makers want to keep it that way. But avoiding more general inflation could prove difficult.
And in terms of economic diplomacy, the measures announced Wednesday were almost precisely the opposite of the steps the Obama administration and many Western economists have been urging Beijing to take.
China’s broadly measured money supply has surged in the last two years, soaring 54 percent as its central bank has supported the export economy by intervening in currency markets to keep the renminbi artificially low. Considerable cash is also sloshing around the Chinese economy because of two years of extremely heavy lending by state-owned banks to finance a highly successful economic stimulus program that has returned the country to double-digit growth.
But China’s leaders are now clearly worried about the inflationary side effects of those financial policies. The premier, Wen Jiabao, has toured southern China over the last week and was shown on national television late Tuesday night expressing concern about rising food prices and promising that the government would take action.
Zhou Xiaochuan, the governor of the central bank, had said earlier on Tuesday that the amount of money racing through the global economy was putting pressure on emerging economies that want to control inflation. And Yao Jian, a commerce ministry spokesman, said at a press conference on Tuesday that the government would tighten scrutiny of foreign investment so as to prevent too much money from pouring into China as foreign investors seek higher returns than are currently available in the West.
Imposing price controls and other administrative controls on the Chinese economy runs counter to the steps recommended by many Western experts. They have suggested that China should further deregulate its economy, let the renminbi appreciate and otherwise rely on market forces to tame inflation.
The standard policy prescription from Washington has been that China should raise interest rates, as a way to slow investment and prevent the economy from overheating. And American policy makers from President Obama down have argued that if China would let the renminbi rise against the dollar, oil and other commodities would be less expensive in China, helping to tame inflation. But Beijing has resisted, in large part because Washington’s prescribed medicine would reduce the price competitiveness of Chinese exports to the United States and elsewhere.
Still, even as China is zigging when Washington would rather it zag, some corporate economists are cautiously optimistic that China may be able to tame inflation with its approach — for now, at least.
“Given that food prices are spearheading immediate inflationary pressures, supply-side measures should be more effective than rate hikes,” Qu Hongbin, the co-head of Asian economics research at the international bank HSBC, wrote in a research note on Wednesday night. “There’s no need to panic, as Beijing has more than enough effective policy options to combat inflation.”
And yet, while there may be limits to China’s ability to keep a lid on inflation, it is better prepared than many countries to cope with rising world commodity prices. That is because China is self-sufficient in most foods, has an enormous trade surplus and has accumulated copious foreign reserves that reached $2.65 trillion at the end of September.
"There’s no need to panic, as Beijing has more than enough effective policy options to combat inflation"
In contrast, the United Nations Food and Agriculture Organization warned on Wednesday that food import bills were up 10 percent this yearfor the world’s poorest countries.
But many economists were surprised by the accelerated inflation in China that the National Bureau of Statistics disclosed in Beijing last week. Overall consumer prices were 4.4 percent higher last monththan a year earlier.
Chinese leaders have repeatedly made clear over the years that fighting inflation is a top priority, because it could fuel social unrest. And they have publicly set a target of not allowing the annual increase in consumer prices to reach 5 percent again. It peaked at 8.5 percent in the spring of 2008.
If food and energy prices are removed from the consumer price index, the prices for everything else are up only 1.3 percent from a year earlier, according to the government. But that is not necessarily a reassuring measure, some economists suggest.
Chinese and Western economists worry that the Chinese price index may underestimate inflation separate from food and energy. The Chinese index has longstanding methodological problems — like measuring apartment rents but not the cost of buying and living in an apartment, which has soared in recent years.
While climbing food and energy prices are a global problem, they particularly affect lower-income countries like China, where such necessities claim a far larger share of household incomes than in more affluent nations. China’s consumer price index, which is based mainly on urban spending patterns, assumes that groceries represent a third of a family’s spending.
That is extremely high by Western standards. And it shows how far China must still go to create the kind of broad-based consumer society that American officials recommend and that Chinese leaders say they want to adopt in the long term in place of their current export-led model. In the United States, groceries represent only 8 percent of the Consumer Price Index.
The State Council, China’s cabinet of ministers, decided on Wednesday that it would stabilize prices for grain, oil, sugar and cotton in particular, according to a statement on a government Web site. The State Council also said that the government would make sure that more diesel reached filling stations, to fuel trucks, and that utility power stations had ample supplies of coal.
The high prices and relative scarcity of diesel fuel have resulted in part from its use by factories, which have been burning it in backyard generators as power companies have cut back electricity generation to meet national targets for limiting energy consumption.
Meanwhile, utilities have struggled to buy enough coal because the government requires coal mines to sell it to power companies at low, regulated prices. The mines, of course, prefer to sell their coal at higher prices on the open market.
Last week, in another move against inflation, Beijing ordered commercial banks to put more of their assets in low-yield accountsat the central bank. The measure, an increase in the so-called reserve requirement, was meant to cool a frenzy of lending over the last two years that has priced urban real estate beyond the reach of most working-class families.
Liang Huoqiao, a 22-year-old plastics worker, said in an interview earlier this year in Guangzhou in southern China that his pay was rising 10 percent a year, to around $300 a month. But his entire annual pay would be enough to buy only about two square meters of an apartment, or 21.5 square feet.
So he planned to buy a car as soon as possible, and worry about a home later.
Zhang Jing contributed research from Beijing.