Curbing inflation high on China's economic agenda in 2011

Updated: 2011-01-03 15:35
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BEIJING - Chinese President Hu Jintao, in a recent speech made while celebrating the New Year with political advisors, reiterated China's stepped-up efforts to stabilize prices in 2011.

A week earlier, Chinese Premier Wen Jiabao, in a live chat over radio with listeners on Dec 26, was seeking public confidence in his government's ability to contain inflation in the world's second largest economy.

China's consumer price index (CPI), a main gauge of inflation, rose to a 28-month high of 5.1 percent year on year in November.
Over the past two months, China has repeatedly stressed its resolution and introduced a series of measures to stem inflation.

The price-stabilizing bid, which carries significance not only in economic terms but also in safeguarding social stability in China, has begun to bear fruit and will continue to weigh high on government's agenda for 2011, analysts and officials said.

Price hike

A sharp price rise of vegetables was suddenly felt around mid-October at a market in Xuanwu district, downtown Beijing, as Li, a local housewife who bought vegetables every morning, recalled.

"Turnips, eggplant and many other ordinary vegetables are more expensive than before," she said. "The price of summer squash has increased from 1 yuan ($0.15) to 2.5 yuan for 500 grams."

A retired literary editor, Li takes care of the daily cooking for her five-member family. She said her family's weekly food expenditure increased significantly, though their income remained unchanged.

Figures from southern Beijing's Xinfadi market, northern China's largest agricultural produce distribution center, indicated the weighted average price of vegetables at the market for the first 10 months of 2010 rose 20 to 30 percent year on year.

Prices of edible oil, pork, eggs, and fruit, among others, also registered rises at Xinfadi market, especially since mid-2010.

China saw a rise in prices of food including grain, meat, aquatic products, fresh vegetables and fruits, and others in 2010, noted Li Jianwei, an economist with the Development Research Center under the State Council.

Calling November's price rises "beyond many people's expectations," Sheng Laiyun, spokesman with the National Bureau of Statistics, cited rises in food prices and housing utility costs as the main drivers of the inflation increase.

Food prices have a one-third weighting in the calculation of China's CPI, and an 11.7-percent rise in food prices contributed to 74 percent of the CPI growth in November. Housing utility costs rose 5.8 percent in November, contributing to 18 percent of the CPI increase.

The pressure from surging prices in food and house rents was apparently felt by citizens, especially low-income earners, in China, where per capita GDP was only one-tenth of that in developed countries, according to officials.

In 2009, the yearly per capita net income for China's urban residents was 17,175 yuan (about $2,526 ) while that for rural residents was 5,153 yuan.

Government's response

Just a day ahead of Wen's remarks delivered over radio, China's central bank announced on Dec 25 that it would raise the benchmark interest rate by 25 basis points, effective from Dec 26. It was China's second raise of interest rates since October 2010.

The country also increased bank reserve requirement ratios six times in 2010.

These steps, according to officials, were taken to target inflation by mopping up excessive liquidity on the market.

Also, China had announced a shift to a prudent monetary policy from a previous moderately loose one to tackle rising inflation and keep economic growth at sustainable pace.

Wen told radio listeners that the country's overall price level started to drop, especially of major consumer goods, one month after the State Council's introduction of a package of price-stabilizing measures.

The State Council on Nov 20 ordered stepped-up efforts made to contain inflation, by increasing the supply of agricultural products, intensifying the crackdown on speculation, hoarding and price-gouging, as well as offering low-income earners subsidies to make up for price rises.

Wen said inflation expectations were more dire than inflation itself, urging people to remain confident that the government will manage to keep prices at a "reasonable" level.

"The fundamental way to stabilize prices is to achieve a balance of supply and demand, which requires continuous development of agriculture," Wen said, adding that the government has worked out measures to boost agricultural production.

Bao Minghua, a professor with Renmin University of China, said that excessive liquidity mainly caused the price hikes, adding that seasonal changes in the output of some agricultural products, and the increase of raw material prices on the international market, also played a role.

Li Jianwei, with the State Council's think-tank, told Xinhua that the past several years saw surging prices, of which food price rises contributed the most growth.

"Our research indicates that the main reason behind the price hikes is the increasing costs," Li said. "These include rising labor costs, increasing agricultural raw materials and equipment expenditures, and higher transportation costs, which have been driven by fuel price hikes."

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Admitting that price speculation played a role in boosting the prices of some specific agricultural products, such as garlic, ginger, and mung bean, as well as others, Li said this factor could only have a limited impact on the CPI.

Li added that the grain price rises that were mainly caused by increasing costs should be tolerated to an extent, but added that he expected the growth rate of grain prices for 2011 to be lower than 2010.

He said the pressure to drive prices higher in 2011 would come mainly from imported inflation, and the rising prices of imported raw materials, like fuel and ore, could boost industrial products' prices and thus, indirectly, affect agricultural materials' prices.

Li urged the government to maintain a balance of stabilizing prices of agricultural products and ensuring farmers a reasonable level of profit.

"I am confident that with all the measures well implemented, the government will be able to achieve the goal of containing surging prices," Li said.