Economists have repeatedly failed to get their predictions on Chinese inflation correct this year, usually undershooting the actual figure and playing down the significance of steadily-rising prices.
The official figures, which hit 4.4% for consumer price inflation in October, also undershoot the situation on the ground, since the markets and restaurants which make up a large share of an ordinary Chinese’ cost of living tend to deal in cash and not to report their earnings to the authorities.
The fact is, people have been grumbling about prices for months now, with some staple foods doubling or even tripling in price. And middle-class Chinese are just as angry about inflation, which has prompted the government to now step in and suggest a series of price controls and micro-level efforts to keep inflation in check.
According to the State Council, China will:
– Control the timing, frequency and magnitude of adjustments to prices that are still set by the government and maintain stable natural gas pricing.
– Strengthen market supervision and urge local authorities to improve subsidy systems for needy families, as well as increase allowances for needy students and school canteens.
– Clamp down on speculation and hoarding, and hold local governments responsible for grain and vegetable prices.
– Release state reserves of grain, edible oil and sugar on the market when necessary to stabilize prices (also today, the Ministry of Commerce announced that it will hold its second auction of reserve sugar this season, with 200,000 tons due to be auctioned next week in an effort to curb price rises, which have exceeded 100% in the last two years).
– Monitor winter vegetable production to increase supplies, take measures to reduce delivery costs of agricultural products, and increase the supply of cotton from the Xinjiang region.
– Reduce prices of power, gas and rail traffic for chemical fertilizer producers, ensure coal supply for power generation companies and increase the production of oil, especially diesel oil to guarantee an adequate supply.
The government is relatively hamstrung by what it can do. If it raises interest rates abruptly, it risks a slide in the property market, and property is now a major source of wealth for the middle-class, 500m of whom own their own homes. If China wants to continue to boost domestic consumption, it cannot afford to erode the wealth base of the middle class which will be doing all the spending, no matter how much the poorest parts of the country grumble. Just the hint that there will be another interest rate rise shortly has sent the Shanghai stock exchange plunging.
The question though is what is behind the inflation? Obviously there is excess liquidity in the system, with M2, the broadest measure of money supply, growing by nearly 20% in October. And there was a poor harvest last year. But that is not enough to explain the 100% or more price rises in some foods.
More likely is the spectre of speculation, which the government alludes to above. Negative real interest rates, with banks offering far less in returns than the inflation rate, are causing speculators to withdraw their deposits and have a gamble on commodities. Farmers are also likely to be hoarding their crops in the hope that prices will keep rising. How to fight the speculators? Well, it’s a tough challenge. Making local governments accountable for prices is an interesting move, and only a short hop, skip and jump away from the good old days of the planned economy.