Monday, May 10, 2010

Inflation threatens to slow down China’s fast-running economy

Just as the world was applauding China for leading the way out of the global recession by posting improbable 8.7 per cent growth last year despite falling demand for its products, inflation is shaping up as the next tripwire in the path of the country’s fast-running economy.

China is to release its April consumer price data Tuesday amid projections that inflation will rise but will remain below the government's annual target of 3 per cent. But many expect it to continue to climb unless Beijing moves to raise interest rates, something it has been loathe to do for fear of slowing overall growth and job creation in this still-developing country.

Beijing might not be able to hold inflation below 3 per cent, a senior government economist admitted on Saturday. “The [3-per-cent] target is ideal. But China faces some difficulties in achieving it,” said Liu Shijin, deputy head of the Development Research Center (DRC), a think-tank that reports to Premier Wen Jiabao’s cabinet. Mr. Liu suggested that keeping inflation below 5 per cent might be a more realistic goal.

The State Information Centre, another government-affiliated think-tank, predicted that prices would rise by 4.2 per cent in the second quarter of this year. “Upward pressure on prices is increasing,” it said in a report released Friday.

The likelihood that Beijing will be forced to intervene in the money markets to curb inflation – along with fears that the European debt crisis could slow demand for Chinese exports – helped push stocks on the Shanghai Composite Index down more than 6 per cent last week to an eight-month low of 2688.38, though it regained some ground Monday.

China is under pressure from the United States and other trading partners to let its currency rise. Critics say the country’s artificially low currency gives Chinese exporters an unfair price advantage. China announced Monday that it had recorded a trade surplus of $1.68-billion last month, 87 per cent lower than the previous April, but reversing a trade deficit of $7.24-billion in March.

China has so far resisted calls to let its currency rise, though many expect it will eventually relent. A stronger currency would allow China more buying power for its imports, providing a check on inflationary pressures.

In response to rising real estate prices, China’s central bank has ordered banks to raise their reserve requirements three times this year, but it has resisted raising interest rates so far.

“We think [the government] will need to tighten more in order to control inflation,” said Li Wei, a Shanghai-based economist with Standard Chartered Bank. He predicted a 3.5-per-cent rise in inflation for the year, including an 8 to 10 per cent jump in food prices. Right now, however, “the government is more concerned with [the possibility of] economic slowdown in the second half of the year.”

Creating jobs for the tens of millions of migrant workers who move from rural areas to China’s cities each year is seen as a necessity for social stability, and the government is loathe to make any moves that might tighten the market for migrant laborers.

But amid the tighter bank-capital measures and expectations other steps will be taken eventually, forecasters see slower economic growth ahead. China International Capital Corp., an investment bank, reduced its 2010 economic growth forecast for the country to 9.5 per cent from 10.5 per cent.

Some economists now believe China’s pace of growth peaked at 11.9 per cent during the first quarter of 2010, and now expect a gradual deceleration for the rest of this year and into 2011 as the government withdraws extraordinary stimulus measures it introduced in late 2008, at the height of the global economic crisis. “For the quarters ahead, we think growth will slow down to around 8 per cent,” said Mr. Li of Standard Chartered Bank.

Many attribute the price pressures that now haunt China’s economy to the same stimulus package, specifically the easy availability of money after banks lent a record 9.6-trillion yuan ($1.4-trillion U.S.) last year as part of a government-led effort to spur the economy.

While the bulk of the money was supposed to go to infrastructure projects, much of it ended up in the hands of speculators who poured it into the real estate market, fueling a 25-per-cent jump in housing prices and the construction of a forest of largely empty office towers and shopping malls in cities like Beijing and Shanghai.

(from Beijing — Globe and Mail Update, May 10, 2010)

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