China Fights Inflation By Restructuring Economy

China consumer prices rose sharply in February, suggesting government might have a difficult time curbing inflation this year.

The consumer price index, the nation’s main gauge of inflation, rose 4.9 percent in February from the same month a year ago,
according to the National Bureau of Statistics.

That jump was slightly above economists’ estimates and identical to the rise in January.

Food prices alone rose 11 percent in February, though analysts say they believe that jump may have been affected by the Chinese New Year holiday.

China consumer prices rose sharply in February, suggesting government might have a difficult time curbing inflation this year.

The consumer price index, the nation’s main gauge of inflation, rose 4.9 percent in February from the same month a year ago,
according to the National Bureau of Statistics.

That jump was slightly above economists’ estimates and identical to the rise in January.

Food prices alone rose 11 percent in February, though analysts say they believe that jump may have been affected by the Chinese New Year holiday.

The government also said the producer price index, a measure of inflation at the wholesale level,

rose 7.2 percent in February, the biggest increase since October 2008.

The figures are the latest evidence China’s booming economy is beginning to overheat,

after two years of heavy lending by state-run banks and huge government investments in infrastructure.

Aware that soaring food and housing prices are creating anxiety at home,

the national government has made fighting inflation a priority and set a target to keep the rate at 4 percent.

Last year, when the economy grew at an annual rate of 10.3 percent, China’s consumer price index rose by 3.3 percent.

But in the final three months of last year, the index rose sharply, to 5.1 percent in November, a 28-month high.

This year, the Chinese government lowered its economic growth target to 7 percent.

To tame inflation, the government has ordered state banks to restrain lending and to raise interest rates.

China has also offered aid and subsidies to farmers.

But slowing inflation has proved difficult, partly because inflation is tied to rising oil and commodity prices.

Economists say they expect food and commodity prices to continue to climb early this year.

“Inflation remains at an elevated level and it has not peaked yet,”

Wang Qing, a Hong Kong-based economist at Morgan Stanley, said.

“We think inflation will rebound in April or May and peak midyear.”

Mr. Wang says, however, that the government’s effort to fight inflation may begin to pay off in the latter part of the year,

and eventually bring the annual inflation rate down to 4.5 percent.

But for now, the public is anxious about food and housing prices that are often rising faster than incomes.

And with saving deposit rates in China kept unusually low by state-run banks,

many people are seeing the value of their savings erode by what are essentially negative returns.

For instance, inflation rose 3.3 percent last year, according to the consumer price index.

But during much of the year state banks were paying rates of 2 percent or less for money held in one-year deposits.

Coping with inflation is just one of the many challenges facing economic planners in Beijing —

and one they are trying to deal with by combining it with a re-structuring of the entire economy.

To encourage more sustainable growth, the government is trying to move away

from heavy reliance on investment and exports and toward more domestic consumption.

Encouraging consumption is part of a broader effort aimed at improving the livelihoods of common people

and shrinking the widening gap from rich to poor.

The government, for example, recently promised to spend hundreds of billions of dollars to build affordable housing,

while contributing large sums of money to health and welfare programs and also raising minimum wage standards.

The strategy of fighting inflation while raising living standards seems a shrewd attempt to balance the Chinese political economy.
Analysts say if inflationary pressure rises too sharply, or growth slows too sharply,

public sentiment could turn against the leadership.

“Inflation will continue to be a problem, but it won’t do the economy in,”

Pieter P. Bottelier, adjunct professor of China Studies at Johns Hopkins University, told the New York Times.

“But it worsens already huge social inequalities and housing affordability problems.

This could breed so much resentment.

I’m worried about the social implications.”

Which is exactly why it’s shrewd to link any fight against inflation

to a simultaneous effort to improve the standard of living for the population as a whole.