As the surging pork price pushes China’s consumer price index (CPI), a key gauge of inflation, to the highest level in three years, new inflation factors start to emerge, posing a potential threat to the already-high inflation in this country. Questions are raised concerning whether the inflationary pressure would continue in the future and how would these factors influence China’s macroeconomic policy.
New inflation factors looming
As the CPI in China hit a new peak of 6.4% in June, pushed up by soaring pork price, some other commodity producers, including cooking oil, milk powder, sports clothing and mooncake, also seem to be brewing for price increases of their products.
Among these, cooking oil price is undergoing the most dramatic fluctuation. A domestic oil brand once raised the price of its products and then had the price reduced again after a short period. Journalists proved the price rise in some supermarkets and wholesale markets in Beijing but also found that other oil brands didn’t follow the trend.
It is worth noting that rise of cost for cooking oil production this year was actually a result of price hike of raw material prices, particularly peanuts, as well as increasing costs for labors and transportations. Analysts warned that once the government stops re-imposing price caps on oil, the price is likely to increase again.
As new price hikes speculation spreads, pressure from old inflation factors is still not basically released, with the already–high price of such foodstuff as pork and fresh-water fish continuing to rise.
According to the statistics of the Ministry of Commerce, pork prices in China were up 2.3% for the week ending July 10. Prices of crucian and carp both climbed 1.3% from the previous week and white croaker price went up 0.1%. Data from the Ministry of Agriculture also showed an ongoing rise of the food prices with the July wholesale price index (WPI) inflation of the basket products obviously higher than the late June.
Yan Wei, chief economist at Orient Securities, pointed out
that so far, this year’s commodity prices have climbed high while the increase of vegetable price was below the historical average. However, this situation is likely to change in the third quarter of the year. As indicated by past data, generally, prices in the third quarter would be slightly higher than both the second quarter and the same period of the previous year. The current trend implies that the price of meat and other food will continue to rise in the third quarter.
Along with the food price hikes, rise in non-food prices is also a matter of concern. From the analysis of China International Capital Corporation(CICC), non-food prices in June were unchanged from the previous month but were higher than the historical average of -0.1%. If we peel off seasonal factors and analyze month-on-month data, non-food price rises seem yet to reach their maximum.
When would inflation reach its peak? Where would macro control go?
Under the on-going pressure of existing and emerging price factors, the widely expected possibility that the inflation would peak before softening is likely to be low within a short period.
Experts point out that currently, it is still unclear whether the CPI would peak, but it is for certain that if the food price continues to rise sharply, CPI would climb a record high from a year earlier. Lu Zhengwei, chief economist with Industrial Bank, said China’s CPI will remain at 6%, with a slight chance of new record high, before falling back after November.
Yan Wei holds a similar view. According to his observation, the surging cost remains the major cause for price hike to a three-year high. The industrial production price (PPI )’s conduction pressure to the CPI is still continuing. In the third quarter, the new factors which push up price are expected to move up the average price level higher than the second quarter.
Regarding the outlook of inflation this year, Wang Jinbin, Assistant Dean of School of Economics of Renmin University, said, since this round of inflation was mainly resulted from higher cost and the side effects of previous stimulus plan and excessive currency input, it was complicated and prevailing in nature. Therefore, medium-term anti-inflation measures would be required. According to him, this year’s inflation is expected to rise first, and unlikely to fall in the late of this year.
However, Qiao Hong, an economist from Goldman Sachs, believed that the CPI increase in the past two months was primarily the result of food price rises, including the price of meat and fish, particularly the pork price. The core inflation pressures were starting to ease and would remain moderate in the coming months. Zhang Liqun, a researcher at the State Council’s Development Research Center, also believed that price stabilizers were increasing as the government measures to cool ris- ing prices were beginning to take effect with vegetable prices falling. He expected that prices would reach high in June and July before it started to stabilize.
Zhuang Jian, senior economist with the Asian Development Bank (ADB) China Branch, pointed out that in the long run, China’s strong economic growth, which is mainly fueled by twisting the pricing mechanism and holding down the resource product prices, is unsustainable. In the following year or two, non-food price rises may become the norm and labor cost will inevitably go up. China will be trapped in the inflation dilemma while transforming its economic growth pattern and adjust its economic structure.
Anti-inflation remains No.1 task in macro control
There are signs that, with inflationary pressure still lingering, antiinflation will still be the primary task of the government’s macro-control and monetary policies in the coming period.
In the four meetings on economic situation held between July 4 and July 11, Premier Wen emphasized that the government pledged to battle soaring prices while sticking to basic macrocontrol measures. Efforts would be made to strike a balance between the stable and rapid economic growth, economic restructuring and inflation expectation management and tame the rising prices without causing the economy to stumble.
In the 11 issue of “China’s financial” magazine, Zhou Xiaochuan, governor of China’s Central Bank, wrote that for a long period of time, China
will be engaged in further implementing prudent monetary policy and optimizing the objective structure of the policy, with more emphasis put on stabilizing the overall price level on a broader basis.
Earlier in the second quarter regular meeting held by the central bank’s Monetary Policy Committee, it was pointed out that as inflationary pressures still remain high, prudent monetary policy will be implemented. Since this year, the Central Bank has raised the deposit reserve ratio of financial institutions on six occasions and increased benchmark deposit and lending interest rates three times, aiming at curbing mounting inflation by reducing currency in circulation.
Peng Wensheng, chief economist at CICC, expected that monetary policy will not be relaxed in the near future and, in light of the inflation and growth trend, interest rates and the deposit reserve ratio are likely to be lifted in the coming months, but not as dramatically as in the first half year.
As indicated by Professor Sun Lijian, vice-dean of the school of economics at Fudan University in Shanghai, although there are no signs for the Chinese government to further relax its macro control policy, there will be structural adjustment in the monetary policy, for example, to enrich the financing channels for small and medium-sized enterprises (SMEs) by encouraging private capital investment and lead the inflow of capital into industrial sector.
According to Peng, changes will be first seen in the fiscal policy. The government will approve more investment projects as the pace of domestic inflation slows down.
(The author: from Xinhua Agency)