October 29, 2007	Monday	Shawwal 16, 1428

‘Too many coins purchase too few goods’ situation has again arisen in China and inflation has become the centre of countrywide debate. However, Chinese economy has not always been inflation prone.

The price level was stable over the past few years but now things are changing and the price level has surged to a record level, despite the government’s counter measures.

China’s central bank has acknowledged the situation and says that, “the nation’s booming red-hot economy is facing increasing pressure from spiralling prices and inflation risks are worthy of attention”.

The consumer price index (CPI), a key measure of inflation increased to 6.5 per cent last month from August last year. This increase is said to be 11-year high. Food prices shot up by 18.2 and the grain prices rose by 6.4 per cent.

Economists have warned that China’s CPI might accelerate by more than seven per cent. Sudden rise in food inflation has put ordinary people into tight corner.

Vegetables, meat, chicken, fish, eggs, cooking oil, milk are selling at ever higher prices. “How can we cope with the situation?” Mrs Li Cuilin, a 56-year old house wife from Shanghai asked.

About three months ago, beef was sold at rmb12 for half kilo gram, but now it has jumped to rmb20. A packet of milk used to sell at rmb20, now it is selling at rmb24. IP telephone card, sold at rmb19 is now available for rmb22.

“I’m in a fix,” said a scholarship student, Ali from Bahrain. “I get only 1100 yuan from the Chinese government. How would I survive on such a meagre amount, in an expensive city, like Shanghai? If my stipend is not raised,, I have no option but to surrender the scholarship and go back to my country.”

Inflation hurts the fixed income groups and the people living on pensions the most. It penalises savers.

Persistent inflation has a long-term impact on economy and stability of currency and investment. It causes economic distortion by reducing competitiveness of export goods and may increase the cost of imports.

High inflation eats into investment returns, encourages investors to shift to short-term speculative business and also casts social impact on the people.

Inflation wreaked havoc on Weimar (Germany) in 1970’s, Argentina in 1980’s and Brazil, post-Vietnam America and

China were also hit. Old Chinese people still remember how hyper inflation helped the communists against the Kuo-mintang government in 1949.

In 1992, China witnessed hyper inflation—a 21 per cent rise in inflation posed a major risk to economy.

However, the 16 control principles land down by the Vice Premier Zhu Rongji saved the situation If the current inflation is not tackled, it may lead Chinese economy into crisis.

According to the National Bureau of Statistics, the producer’s price index (PPI), a key production cost indicator shows a downward trend. The raised CPI is the result of food price hike.

However, the Beijing officials believe that current rise in inflation rate is not a real threat to the economy as the CPI has gone up because of some accidental reasons.

Food inflation is related to supply shortage, owing to floods, drought and massive out break of swine “blue-ear” disease which has killed more than 45,000 pigs and led to slaughter of another 43,000, resulting in the pork price going up.

If we look into the situation thoroughly, it appears that prices rose not solely because of accidental and temporary factors however the Beijing officials still believe that the current rise in inflation was due to supply shortage.

In other words, they consider the supply side as the real reason. Hence, they ignore the demand side.

Some experts see the situation as more of demand pull inflation. Demand pull changes in the price level are attributed to an excess of total spending beyond the economy’s capacity to produce.

Since the last decade, Chinese consumption pattern has changed significantly. Consumer behaviour is out of control. It is not easy for the government to stop this consumption frenzy. As the economy is growing rapidly, incomes are also rising.

And the increasing incomes, along with the rapid move of millions of rural Chinese into cities, are the main factors driving consumption. In economics, it is called trickle-down effect which works in following way.

The price hike raises demand and results in higher pay and wages. The wage rates are rising at the rate of 10 per cent per annum. Most of Chinese companies are under immense pressure to raise wages and salaries. It means more cost of production. If cost of production rises, the producers normally raise prices.

In order to avoid such situation, government can take several counter measures: Inflation can be stopped through tight monetary policy by cutting money supply ;interest rates can be raise; cut backs on construction projects can also help in reducing loans; some restrictions can be imposed on the development of bio-energy processing industry; subsidy to pig and poultry industry and import of essential items.

China is among the biggest petroleum consumers. Petroleum prices are rising vertically. It is necessary for China to explore other sources of energy. Some steps have been taken but more are needed.

— The writer is doing PhD in economics at the Shanghai University