CPI rise cause for modest optimism

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Last updated at: (Beijing Time) Monday, November 17, 2003

CPI rise cause for modest optimism

Higher food prices are not a cause for panic; on the contrary, they may be a boon for the Chinese economy today.

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Higher food prices are not a cause for panic; on the contrary, they may be a boon for the Chinese economy today.

Latest statistics show that nationwide price hikes for agricultural produce in October sent the country's consumer price index (CPI) soaring to a six-year high.

To the relief of most Chinese economists, the CPI, a key inflation gauge, rose by 1.8 per cent year-on-year last month. That could mean the country is finally stepping out of a deflationary mode which has been lingering since 1997.

Although the Chinese economy notched an 8.5-per-cent growth in the first three quarters, against all the odds after the outbreak of SARS (severe acute respiratory syndrome), the conspicuous gap between investment and consumption has put a big dent in domestic economists' confidence in the staying power of the current growth momentum.

But October's jump in the CPI indicates that the country's red-hot investments are filtering through, after a lag, bringing stronger consumption.

This provides grist for the alarmist view that inflation is just around the corner. Some even call for the authorities to beware of runaway inflation.

However, other economists insist that the robust growth of the Chinese economy so far this year has already put upward pressure on prices.

Steel and coal prices have escalated as the country's industrial sectors have strengthened steadily this year.

With so much slack in the economy, the price hikes would unlikely trigger serious inflation.

The acceleration of industrial growth has brought soaring demand for steel, coal and electric power, but the underlying fact is that almost all kinds of major commodities in the Chinese market are either adequately supplied or over-supplied.

Over capacity remains a pressing problem the country has to address before it can shrug off lingering deflationary pressures. In this sense, a mild consumption-led inflation would appear desirable for the Chinese economy.

Moreover, the CPI rise last month is largely a result of the jump in food prices, which benefits farmers significantly.

Food prices, which make up more than 30 per cent to the CPI indicators, were up 5.1 per cent in October compared to figures for a year ago, with grain rising 3.2 per cent and fresh vegetables soaring 16 per cent.

The combination of drastic agricultural restructuring and natural disasters, to a large extent, caused grain prices to climb quickly last month. Yet, the hike started from a very low base since grain prices had fallen by 18.8 per cent between 1998 and 2002. It is natural for grain prices to bottom out as the national economy definitely enters a new round of fast growth.

The Chinese government has been intent on increasing farmers' income to narrow the widening development gap between rural and urban areas in recent year. And the shrinking arable land and output gain in recent years also require measures to ensure adequate grain supply.

The rebound of grain prices should thus be carefully protected not only to fatten farmers' pockets but also to boost their interest in growing more and better crops.

On the other hand, policy-makers should be cautious about some other prices hikes, such as in education-related fees and medical charges. Both have soared more than 10 per cent annually for the past five years.

The risk of giving such prices a free rein lies in not fueling inflation but forcing the masses to further tighten their purse strings.

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