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Print Edition> Business
UPDATED: November 15, 2010 NO. 46 NOVEMBER 18, 2010
Inflation Returns
Striking a balance between economic prosperity and inflation remains a problem for China

CHILLY PRICES: Now that winter has arrived, food prices, especially vegetable prices in supermarkets across China, are soaring (XU SUHUI)

Before being able to catch its breath following two strenuous years of policy implementation following the global slowdown, the Chinese economy finds itself up against another challenge: inflation. Just as it did three years ago, consumer inflation, on everything from garlic and food to diapers and non-perishables, is plaguing the Chinese mainland.

The consumer price index (CPI), a barometer for inflation, soared 4.4 percent year on year in October, the highest in almost two years, mostly driven by increases in food prices. The inflation rate is expected to increase further in the last two months of this year due to a low comparison base in 2009.

The prices of daily necessities have been rising since China's 4-trillion-yuan ($586-billion) stimulus plan was put in place in November 2008. Some goods, pushed up by massive cash injection and possible speculation, have seen their prices surge above pre-crisis levels.

As usual, food is being singled out as the culprit for the rising prices. In Xinfadi, Beijing's largest vegetable, fruit and grain transaction center, rice was sold at 1.6 yuan ($0.24) per kg last winter. This year, the price has almost doubled to 3 yuan ($0.45) per kg.

Some families are even missing the months following the financial crisis, when the prices of food, housing and autos had settled at relatively affordable levels after months of increasing. The previous round of inflation started in early 2007 and continued until the outbreak of the financial crisis in 2008.

Already, some people in Shenzhen, Guangdong Province, are traveling to nearby Hong Kong to buy soy sauce, eggs and other daily necessities since Hong Kong food prices are noticeably cheaper.

The price of staple food, such as wheat and rice, jumped more than 10 percent in October from the previous few months. News of a food crunch—in mung beans, garlic and sugar—has dominated Chinese newspaper headlines this year. And reports of food smuggling, hoarding and profiteering have stoked public anger and caught the attention of the Central Government.

The Chinese central bank raised both the benchmark loan and deposit interest rates by 0.25 percentage points on October 20, the first increase in three years. In spite of the hike, the real interest rate in China is still in negative territory, diminishing the value of citizens' savings in commercial banks.

The latest China Quarterly Update issued by the World Bank China Office on November 3 said inflation, pushed up by higher food prices, may stay above the 3-percent target for a while and is unlikely to escalate as core inflation remains in check. However, the update contended raw commodity prices might rise further. Sustained high wage growth, while unlikely, also cannot be ruled out. Given the fundamental drivers of property prices—rampant liquidity and people's desire for better living conditions—the property sector is unlikely to be contained for long. On current trends and policies, the external surplus is on course to rise in 2011 and in the medium term.

The cause

There's simply too much cash in the market, said Xie Guozhong, an independent economist and a director at Rosetta Stone Capital Ltd. Xie argued the market supply has always remained stable, so the root cause for surging prices is oversupply of money.

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