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China Inflation `Volcano' May Prove Too Hot for Controls After Cash Surge
Bloomberg News
“you’re sitting on a volcano,”
Quantitative easing in the U.S. puts China’s seat to the fire.
Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.
“I’m struggling to make ends meet with costs going up like this,” said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. “Raising prices is the only way out,” he said, predicting he won’t be able to hold out beyond two months.
Premier Wen Jiabao’s cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.
“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.
Lagging Behind
The People’s Bank of China has raised its benchmark interest rates once this year, lagging behind Malaysia, Thailand, Taiwan and South Korea as emerging Asian economies led the global economic rebound. Policy makers have instead relied on guidance to banks to scale back lending and on increases in reserve ratios, with the PBOC announcing the fifth boost of the year four days ago.
The Shanghai Composite Index tumbled 1.9 percent at today’s close, extending the benchmark’s biggest two-week slide since May, sparked by concern that accelerated monetary tightening will crimp economic growth.
China’s plans to rein in prices include selling state food reserves, stabilizing the cost of natural gas and cracking down on speculation in and hoarding of agricultural products, the State Council said. The aim is to damp food inflation that reached 10 percent in October, more than twice the 4.4 percent headline rate.
At a food market in Beijing’s Deshengmennei Avenue, fruit- stand owner Wang Yanling says sales of apples have slumped from as much as 250 kilograms (551 pounds) a day a year ago to about 100 kilograms a day after prices soared more than 60 percent.
“People are buying less with prices jumping up,” said Wang. “It’s getting harder and harder to sell.”
McDonald’s Corp., the world’s largest restaurant chain, said Nov 17. that it increased prices for its burgers, drinks and snacks in China to offset costs.
“Quantitative easing in the U.S. puts China’s seat to the fire because it forces more inflationary pressure onto them,” said Diana Choyleva, a Hong Kong-based economist at Lombard Street Research Asia. “They cannot avoid what they need to do,” which is raise rates or let the yuan strengthen, she said.
Bloomberg News
“you’re sitting on a volcano,”
Quantitative easing in the U.S. puts China’s seat to the fire.
Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.
“I’m struggling to make ends meet with costs going up like this,” said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. “Raising prices is the only way out,” he said, predicting he won’t be able to hold out beyond two months.
Premier Wen Jiabao’s cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.
“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.
Lagging Behind
The People’s Bank of China has raised its benchmark interest rates once this year, lagging behind Malaysia, Thailand, Taiwan and South Korea as emerging Asian economies led the global economic rebound. Policy makers have instead relied on guidance to banks to scale back lending and on increases in reserve ratios, with the PBOC announcing the fifth boost of the year four days ago.
The Shanghai Composite Index tumbled 1.9 percent at today’s close, extending the benchmark’s biggest two-week slide since May, sparked by concern that accelerated monetary tightening will crimp economic growth.
China’s plans to rein in prices include selling state food reserves, stabilizing the cost of natural gas and cracking down on speculation in and hoarding of agricultural products, the State Council said. The aim is to damp food inflation that reached 10 percent in October, more than twice the 4.4 percent headline rate.
At a food market in Beijing’s Deshengmennei Avenue, fruit- stand owner Wang Yanling says sales of apples have slumped from as much as 250 kilograms (551 pounds) a day a year ago to about 100 kilograms a day after prices soared more than 60 percent.
“People are buying less with prices jumping up,” said Wang. “It’s getting harder and harder to sell.”
McDonald’s Corp., the world’s largest restaurant chain, said Nov 17. that it increased prices for its burgers, drinks and snacks in China to offset costs.
“Quantitative easing in the U.S. puts China’s seat to the fire because it forces more inflationary pressure onto them,” said Diana Choyleva, a Hong Kong-based economist at Lombard Street Research Asia. “They cannot avoid what they need to do,” which is raise rates or let the yuan strengthen, she said.
