China is rightly proud of its modern record of successfully feeding its vast populace. After the disastrous famines of the 1950s and 1960s, when crazy Maoist economics helped kill millions, the leadership has done a much better job of ensuring that one-fifth of the world’s population does not go hungry.
But growing signs of a world food shortage are worrying the policymakers in Beijing. They fear that a combination of international price rises and domestic inflation could provoke unrest at home.
The soaring price of staples has already sparked riots in Haiti, and India’s government recently imposed a ban on all rice exports in an attempt to prevent similar protests there. Last month World Bank president Robert Zoellick called for a “new deal” to address the emerging world food crisis, while IMF head Dominique Strauss-Kahn warned that rising food prices risked provoking war.
China’s primary concern is that food inflation will hit the rural poor – who devote a large portion of their income to expenditure in this category.
Premier Wen Jiabao was obliged to reassure the country that grain stores are sufficient to ensure supply and keep prices in check. But officials at the State Grain Administration have warned that shortfalls in production, rising fertilizer costs and the global food shortage will put pressure on domestic grain prices. It announced that rice farmers would be given increased subsidies to ensure no further shrinkage in rice acreage this year.
Nevertheless, rising food prices have driven inflation to its highest level in nearly 12 years. The consumer price index (CPI) hit 8.9% in February and barely slowed in March. The official target for the year is to keep the CPI at 4.8%. To meet it, inflation would have to stay below 4.2% for the next nine months. With factory gate inflation leaping in March, economists now predict a CPI figure between 8.0% and 9.3% for the second quarter.
Another concern is that rising expectations of spiraling prices will become a self-fulfilling prophesy, as producers delay selling goods to benefit from higher prices tomorrow, while consumers jump in early for the opposite reason.
Beijing hopes its tight monetary policy will nip these expectations in the bud. Aside from food shortages, economists also blame an over-abundance of money in the economy for pushing up consumer prices.
The central bank has ordered commercial banks to set aside more money as reserves and implemented tighter lending quotas. Further increases in interest rates are also in the cards. Despite making a record US$115 billion in loans in January, banks now appear to be toeing the line. There was a moderate slowdown in both new money supply and lending during March.
Yet the problem remains that tightening monetary policy is likely to have little effect on inflation, because soaring food prices reflect a shortage of supply rather than excess demand caused by easy access to capital.
A better plan would be to keep speeding up the appreciation of the yuan. This would give China greater buying power in international markets, – lowering the cost of importing expensive commodities like grain – and help to cut the inflow of cash from export earnings.
With the yuan breaking through the psychological barrier of 7.0 to the US dollar in April, Beijing seems to agree. Perhaps US critics of China’s exchange rate policy should be thanking the global food shortage for finally getting their job done.