High inflation bites in China (Feature)

By Andreas Landwehr Dec 14, 2010, 7:10 GMT

Beijing - Surging inflation in China is hitting the less well-off hard.

'Everything is more expensive, especially fruit and vegetables,' said 62-year-old Zhang Li.

The price of white cabbage has doubled since last year - even though the authorities monitor prices. Otherwise it would have risen fourfold, the pensioner knows from reading the papers.

'Everyone is complaining.' That is especially true in areas where they stock up on white cabbage for the winter.

But other basic food items have also become more expensive including cooking oil, sugar and grains.

The National Bureau of Statistics in Beijing confirmed what the pensioner said.

'Prices have risen above expectations,' spokesman Sheng Laiyun said.

In November, consumer inflation stood at 5.1 per cent, a 28-month high. Food prices rose 11.7 per cent - the cost of fruit climbed 28 per cent - with dramatic consequences for the mass of the population who earn little.

'Who can afford all that?' asked Zhang Li. 'It's no problem for the rich. But what are we supposed to do?'

The income gap is rising and unrest among the Chinese is not confined to the food markets.

In a school in Liupanshui in southern China's Guizhou province children wrecked their school canteen to protest against higher prices for their school meals, state media reported.

The communist leadership has long been aware of the potential for social conflict engendered by rising prices. High inflation and corruption prepared the ground for the democracy movement that the military put down in a bloody crackdown around Tiananmen Square on June 4, 1989.

At the annual economy conference that sets the course for the next year, China's leadership on Sunday resolved to 'put stabilizing the overall price level in a more prominent position' in their economic policy.

As the economy shows signs of overheating - growth this year is expected to come in at 9.9 per cent - experts predict fresh interest rate rises and lending curbs.

In November alone the reserve ratio for bank deposits was raised three times and the central bank raised the key interest rate in October for the first time in three years.

The economy conference warned against 'blindly pursuing high economic growth' but said attention should to be paid to efficiency and quality. It added that employment and the standards of living should be raised.

'Credit should go to the real economy, especially the agricultural sector and small business,' the government said. In the last couple of years the money has mostly gone into state businesses and into property and share speculation.

The government plans to move from a 'relatively loose' to a 'prudent' monetary policy in the new year after the stimulus programme and the large doses of credit successfully fended off the world economic crisis.

At the end of November, the annual loan target of 7.5 trillion yuan (1.13 trillion dollars) was reached. Experts predict a maximum target of 7 trillion yuan worth of new loans for next year.

It is not only food prices that are rising. The cost of flats, running a home, raw materials and health care are also increasing.

The producer price index gained 6.1 per cent in November.

'The combination of easy credit, a property bubble in many cities, and worsening structural inflation all argue for higher rates to cool growth and prevent inflation expectations from deteriorating,' said Ben Simpfendorfer, China economist at the Royal Bank of Scotland.

'However, the imbalances in the composition of growth, especially the reliance on credit and construction, are a restraint on more decisive action,' Simpfendorfer said.

So it will only be a weak consolation for the Chinese that prices will not rise more strongly in future. Experts expect inflation to continue at around 4-5 per cent in 2011 despite the efforts to stabilise prices. The boom will be reined in a bit but the Academy of Social Sciences still anticipates strong growth of 10 per cent next year.

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