China's consumer price index (CPI) rose by 1.8% in October and 3% in November, the fastest in six years, leading some economists to wonder if China's deflationary trend is finally bottoming out.
State media has run repeated stories quoting leading Chinese economists who all agreed that China would see a higher level of inflation in 2004.
UBS economist Jonathan Anderson agrees, saying that rising Chinese prices would go some way to resolving a number of issues the country is currently facing, including its undervalued currency, sagging equity prices and even banking balance sheet woes. But UBS forecasts that while CPI growth will hit 5% or even higher in 2004, inflation will fall back down to about 1 or 2% in 2005.
The average export prices of China's manufactured goods have been falling since 1997, taking global prices down with them. So an inflationary upturn in the country could affect consumers of Chinese-made products all over the world. But if inflation were to then subside to a growth rate of 2% in the medium term, experts believe this would probably not be enough to sustain price increases abroad.
Chinese state media reports quoted various government economists as saying the country need not fear a repeat of the runaway price rises that caused such turmoil in the early 1990s.
Back then there was a similar sharp acceleration in money and credit growth, combined with levels of intense investment comparable to those currently being seen in particularly the automobile, steel and property sectors.
In late 1992, within 12 months of the initial upturn, inflation hit double-digit rates, peaking at 25% year-on-year in late 1994 before the government, under the steady hand of then-Premier Zhu Rongji, managed to cool things down.
There are a number of reasons why inflation is not expected to spiral out of control as it did back then. First, the Chinese authorities are tightening credit and investment policies, and UBS expects demand to cool in the first half of next year as a result. Also, another wave of production capacity in sectors like automobiles, steel and property should come online early in 2005, and the huge increase in supply which will result will serve to dampen price rises.
Many industries are already oversupplied. After the spectacular increase in grain prices in October, and the subsequent rise in food prices, the government released figures indicating that supply exceeds demand for 78.8% of 600 main commodities.
In addition, state media has pointed out that growing urban unemployment, which should lead to decreasing incomes for millions of city dwellers, could exacerbate the oversupply and reduce the pressure for further price increases.