China Market

Investment, consumption and export has for many years been driving forces of the Chinese economy.

Inflated fears

Inflation in China is a problem for the country but not for the world

“the monetary authorities without much grasp of market tools.” They fear that the economy is ‘“beyond control”, China is once again stirring their fears. In the year to November consumer prices rose by 5.1%, the fastest increase for 28 months and a striking turnaround from the deflation of the year before (see chart): last month Starbucks bumped up the price of a whipped-cream Frappuccino by about 6%.

About 75% of China’s inflation is the result of higher food prices. But in 2010, unlike 2008, disruptions to food supplies have been modest. China experienced harsh weather early in the year and floods in the summer. But it suffered nothing like the blue-ear disease that took such a toll on the country’s pigs in 2007-08.

Food inflation may, therefore, reflect stronger demand rather than weaker supply. As China’s households grow richer, meat, poultry and milk are claiming a bigger share of their budgets .If the share of spending on other things were to shrink, this need not be inflationary.

Food prices will settle at a higher level, or fall back. The central bank’s only job is to make sure higher food costs do not translate into higher pay demands, which might start a wage-price spiral.

But many economists now worry that the problem runs deeper than food. If the prices of vegetables, fruit and other crops are more flexible than other prices, food inflation may be an early warning of an overheating economy. Perhaps China’s monetary policymakers have let the economy slip their grasp again. They have allowed the money supply to grow by half since January 2009, real interest rates to plunge and bank lending to breach government quotas. The central bank’s own survey of households shows inflationary expectations at their highest for over a decade.

The People’s Bank of China (PBOC) did...