AP
Food Prices Fuel China Inflation Fears
Sunday August 19, 2:05 pm ET
By Joe Mcdonald, AP Business Writer
China's Sharp Jump in Food Prices, Which Have Risen 15.4 Percent, Fuels Inflation Fears


BEIJING (AP) -- Grocery shopping has become a painful experience for Zhang Xueyi. Meat prices have risen 50 percent in the past year, and eggs and other products are not far behind, forcing the 31-year-old railway technician's family to spend a third of its $400 monthly income on food.

"If prices go up more, we have to pay. We'll cut back somewhere else," said Zhang as he hefted bags of eggs, vegetables and rice from the market down a narrow Beijing lane.

After a run that has seen sizzling growth top 10 percent for four years, analysts say China's supercharged economy is facing strains that could break out into an upsurge of inflation.

So far the worst damage has been confined to food prices, which jumped 15.4 percent in July over the same month a year ago and drove overall inflation to a decade-high 5.6 percent. But wages are rising too, as are the costs of oil and electric power. Record-setting exports and a stock market boom are sending cash flooding through the economy, stoking demand for goods.

The Chinese economy "might have entered a region where we should be on guard," said a central bank official, Zhang Tao, quoted last week by the state newspaper China Securities Times.

If the trend goes unchecked, the impact could be felt abroad as consumers who depend on China as the world's low-cost factory have to pay more for appliances, shoes and other goods. Pinched Chinese consumers might spend less on foreign goods, widening a yawning trade surplus that has strained relations with Washington and other trading partners.

Economists say the latest price spike is due mostly to temporary shortages of pork, the staple meat whose price soared 86 percent in July from a year ago.

Pressure is growing in energy, where Beijing is holding down retail prices by blocking state-owned gasoline and power companies from passing on higher costs, said Nicholas Kwan, an analyst for investment bank CLSA in Hong Kong.

Chinese oil refiners are losing $5 per barrel of oil that they process into gasoline or diesel, he said.

"I think it's just a matter of time until they have to bite the bullet and raise domestic prices," Kwan said. "Otherwise they risk an artificial shortage because oil companies will refuse to refine oil into gasoline if they are losing money."

Wages rose 21 percent in the first quarter of the year over the same period of 2006, according to the government, as companies competed for labor. Even that rise might not reflect the extent of pressure faced by employers, because those data cover only government companies, not the booming private sector.

"There's very little spare labor for manufacturing now, so we think we're seeing more wage pressure," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai.

Add to rising costs the "wealth effect" produced by a stock market boom. The country's main stock index is up more than 70 percent this year, making speculators rich on paper and fueling spending.

Exporters already are struggling with the steady rise of China's currency, the yuan, which has pushed up the U.S. dollar prices of their goods by almost 10 percent over the past two years.

The price surge has alarmed Chinese leaders, who remember that 1989's Tiananmen Square pro-democracy protests were driven in part by anger at raging inflation that exceeded 18 percent a year.

Premier Wen Jiabao has ordered urgent measures to boost food production, promising farmers free vaccinations and other aid to raise more pigs. Local authorities have been ordered to subsidize the grocery bills of poor families.

Beijing has raised interest rates three times this year to cool the boom and avert a rise in inflation. After seeing the July price data, economists said they expect another rate hike shortly.

Until now, intense price competition in a Chinese market filled with low-cost goods has prevented makers of most goods from passing on rising costs to consumers. But economists say struggling companies might finally be forced to stand their ground and rise prices.

Last week, the government said an investigation into rising food costs found that makers of instant noodles illegally colluded to push up prices by up to 40 percent.

An official of a noodle trade group defended the increase as a response to rising raw material costs that have slashed profit margins to as little as 1 percent.

"If we don't lift the prices, there will be no profit," the official, Meng Hesu, was quoted as saying.