Battling Inflation - China's Number One Priority

BEIJING — To understand why China's leaders are jittery about the political fallout from rising inflation, it helps to wander city markets and listen to Chinese consumers grumble about rising prices.

7 March 2008

3 minute read

Asia

The price of everything has just gone mad Zhou Qiongfang, a housekeeper, told Tim Johnson of McClatchy Newspapers, as she looked over slabs of raw pork at a wholesale market.

"At every meal, I eat less," she added. Heeding the chorus of complaints, China's leaders pledged anew this Thursday to stabilize prices and rein in inflation, which hit an 11-year high of 7.1 percent early this year. It marked the second straight day of such promises.

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"We think the government is too optimistic .We believe that the government is still underestimating the risk of inflation, as it did in the past six months."

Ma Jun analyst with the Deutsche Bank, Hong Kong.

The report in the Times Argus continued that if China is unable to tame its rising prices, American consumers are likely to suffer. With the US economy already dependent on a wide variety of goods — from Nike shoes to vitamins — that are made in China, the combination of China's inflation and a weakening US dollar certainly will jack up prices.

The battle against inflation "will be the No. 1 item on our agenda," Ma Kai, China's top economic planner told the paper. Other economic and banking officials said China would use a variety of economic tools — including currency revaluation and interest-rate hikes — to meet a target that Premier Wen Jiabao set a day earlier of pulling down inflation to 4.8 percent this year.

Rising inflation, just an economic nuisance a few months ago, could turn into a political problem for China's leaders, whose legitimacy rests partly on delivering steady improvement in standards of living. Rising global energy prices and catastrophic snowstorms a month ago in China have caused food prices to shoot up.

Hard Hit

Inflation in China hits particularly hard at urban residents on fixed incomes, such as retirees and factory workers, many of whom have seen a sudden erosion in their rising living standards.

"People complain more. They say, 'How come the prices go up so quickly?"' said Yang Huaming, a 25-year-old salesman who was shopping for food.

Some economists doubt that China can bring down inflation significantly this year.

"We think the government is too optimistic," analyst Ma Jun of Deutsche Bank's Hong Kong office said in a research report to clients. "We believe that the government is still underestimating the risk of inflation, as it did in the past six months."

He said that inflation was likely to remain at a stubbornly high 6.4 percent this year. Ma Kai, China's chief planner, alternated at a news conference between giving bold pledges to ensure that inflation doesn't accelerate from trot to canter and suggesting that there are justifiable reasons for some price increases.

He said that the price of pork, a Chinese staple, had remained depressed for a decade until last year, when various factors brought it back up to 1997 levels.

"Given the past decade of cost increases and our own income rises, comrades, the price hikes are quite reasonable," he told Times Argus.