China’s Inflation Ticks Higher

Earlier stories:

Return to Sender: China’s Poisonous Present

Asia May Catch Cold After All

Additional evidence that China’s stubborn inflation is being exported to the United States and other major importers has come in the form of Bureau of Labor statistics showing import prices from China rose 0.3 percent in August, the fourth consecutive month the index has risen by at least that much.

Prior to May, according to the labor bureau, the index had not risen by more than 0.2 percent since it began publishing statistics individually in December 2005. Prices have now increased by 1.1 percent for the year ending in August.

There are signs that after months of complacency, Beijing is finally getting worried about the country’s torrid economy. It may be too late, as imbalances start to play through the system. The People’s Bank of China, the country’s central bank, announced last week that it would raise the reserve requirement – the amount of money and liquid assets banks must hold in reserve – by half a point to 12.5 percent, the highest in 17 years as the country seeks to cool things off.

However, the general consensus of economic forecasts is that China’s 2007 inflation rate will climb to 4.2 percent, well above the government’s 3 percent target, primarily fed by soaring food prices.

“The net effect of the higher-than-expected food prices has led to a revision in (China’s) full-year inflation forecast to 4.2 percent from 1.8 percent,” according to an update of the Asian Development Bank’s 2007 Asian Economic Outlook. Senior ADB economist, Zhuang Jian, said in a briefing Monday, “It also raised the forecast for next year to 3.8 percent from 2.2 percent, as price reforms in the state-controlled public utility sector are likely to help keep overall inflation high even if food prices ease. Reforms on prices of goods such as water, power and gas are likely to be launched gradually next year with the easing of food prices, keeping relevant prices at a fairly high level.”

China’s consumer price index rose by 6.5 percent in August, the highest rate in more than a decade, prompting the central bank to raise interest rates for the fifth time this year. Inflation was led by an 18.2-percent rise in food prices amid soaring world grain prices and a swine disease outbreak in China that has sparked a massive pig cull.

Further interest rate hikes are almost inevitable if inflation remains high over the next few months.

Rising inflation presents China’s leaders with a major dilemma. If they step down too hard and slow the economy, they risk exposing overcapacity problems. Chinese manufacturers, lured by the prospect of seemingly endless exports to the west, have been piling on capacity like there is no tomorrow. The higher cost of debt, combined with tighter credit as the reserve requirement rises, means companies are going to have to scale back expansion plans. But China, as fast as its economy has been growing, needs to create as many as 100 million new jobs a year to dry up the vast numbers of unemployed still left over from failed state-owned enterprises and the millions of people leaving the farm for the cities.