China inflation spikes due to food prices

 

A SHARP rise in food prices drove Chinese inflation to its highest level in nearly three years in May, prompting fears that recent social unrest could worsen as consumers struggle to deal with a rise in prices for foodstuffs.

Although the Chinese economy has grown strongly for the last three decades, the inflation figures have fanned anxieties that the world’s second-largest economy could be headed for a fall.

Nouriel Roubini, the economist known as the “Prince of Darkness” for his accurate prediction of the financial crisis, warned that China would have a “hard landing”, and that this could have global ramifications.

Data from the National Statistics Bureau showed the consumer price index increased by 5.5 per cent in May, which matches what economists had expected, but when combined with sharp rises in April and May it paints a picture of a dangerously overheating economy.

Many believe there is an increased risk that rising food prices will spill into more generalised inflation, which would have serious political ramifications.

China has seen a wave of street demonstrations, bombings and riots across the country, from impoverished Inner Mongolia to the southern boomtowns of Guangdong province.

The Communist Party is keenly aware it needs a strong economy to maintain its grip on power, and that it needs at least 8 per cent growth to keep providing jobs.

The party is focusing on ensuring that rising prices do not promote instability and unrest. Soaring consumer prices helped trigger the Tiananmen Square protests that were crushed by the army in 1989.

Food costs are not expected to keep rising because supplies are set to improve during the summer, but they do highlight some of the problems facing China.

For example, the government has been keeping a lid on bank lending to stop prices going out of control, which in turn has badly affected small businesses, the backbone of China’s remarkable growth story.

“We’d all better go on a diet. It used to be too expensive to eat pork or beef, so I switched to eating vegetables, but now even vegetables are too expensive, so we have to switch to drinking water to avoid eating food,” blogged Tiantangyue.

The inflation rise in May was the fastest since July 2008, when the rate was 6.3 per cent, before peaking in February 2008 at 8.7 per cent. The financial crisis led to prices falling, because demand for China’s exports fell sharply.

The price rise has been harsh, one woman said.

“A simple example: rice was only 0.65 yuan per 500g in 2000, and now it’s 1.8 yuan (19 cent). Eggs were 2 yuan per 500g and now they cost 4.5 yuan on special discount in the supermarket. How can we live?” she asked.

Mr Roubini told a gathering in New York that the outlook for China was fairly bleak. His views have major credibility, because he correctly called the US housing meltdown that sparked the global downturn.

“There is a meaningful probability of a hard landing in China after 2013. It is a glass that is half full and half empty,” said Mr Roubini.