Trouble in the global crude oil market at the end of October saw Beijing renege on an earlier promise not to raise fuel costs and hike petrol and diesel by nearly 10%.
Fuel prices are kept artificially low in China to protect consumers but, with crude costing more than US$90 per barrel, the burden became too much. Some small refiners stopped production and many gas stations temporarily closed or rationed fuel.
Despite the price rise, refiners are still struggling and the National Development and Reform Commission has said it is willing to push ahead with price liberalization of resources and utilities. But some see it as the last thing Beijing needs as it tries to control inflation.
The consumer price index rose 6.5% in October from a year earlier, equaling the 11-year high it hit in August. Once again, food prices were behind the strong growth. Pork prices were up 54.9%, fresh vegetables gained 29.9% and eggs rose 14.3%. The fuel price increases were the key driver of non-food inflation, which increased 1.1%.
With Beijing fearing that rising prices could lead to social unreset, further macroeconomic intervention to cool the economy is likely to follow.
Interest rates have already gone up five times this year and bank reserve ratio requirements were raised for a ninth time on November 26 from 13% to 13.5%.
Yet spending on fixed assets in urban areas still grew 26.9% year-on-year during the first 10 months of 2007. JPMorgan calculated that spending rose 30.7% in October alone, the fastest rate since June 2006. This news extinguished much of the hope that a decline in October’s industrial output growth might have engendered.
Pressure is also set to intensify from abroad as China’s October trade surplus came to a new record high of US$27.05 billion.