China's Prices Rise 4.9%

15-Feb-2011 

Wall Street Journal

BEIJING--China's consumer prices rose 4.9% in January from a year earlier, prompting worries that the world's second-largest economy is falling behind in the fight against inflation, as are other countries in Asia.

While the increase in the consumer price index, which was faster than December's 4.6%, doesn't sound especially high by U.S. standards—let alone the sky-high levels of Latin America in the 1980s—Chinese leaders are extraordinarily sensitive to inflation, which has long been associated with political unrest. The headline numbers also underplay the impact on many ordinary Chinese. The foods component, for instance, jumped 10.3%, and has averaged more than 10% for the past four months. Hundreds of millions of Chinese still live at or just above poverty levels, and so are especially sensitive to food increases.

The numbers also don't capture adequately the rise in assets, such as housing prices. Lu Feng, director of Peking University's Macroeconomic Research Center, said that China's extraordinary gains in manufacturing productivity hold down the cost of manufactured goods, which is reflected in the consumer price index.

Inflation is caused by too much money in the system chasing too few goods, he said, and that "excessive money largely goes to asset markets, so it boosts asset prices and can even result in asset bubbles," including possible bubbles in such items as housing, antiques and ancient paintings. 

China's National Bureau of Statistics reworked the way it calculates the CPI, in part by decreasing slightly the weighting of food and increasing the weighting of housing items. The National Bureau of Statistics said that using the old measure the inflation rate in January would have been slightly lower. But a Wall Street Journal calculation using an estimate of the old weighting shows it may have produced an inflation reading of 5.1%—higher than the government reported.

China has raised interest rates three times since October, most recently last week, but benchmark lending rates, at around 6%, are still barely above the rate of inflation.

Earlier this month, Chinese Premier Wen Jiabao tried to reassure the public that the government would tame inflation by attacking China's rising food costs. 

"We are confident that we have the ability to promote the stable development of agricultural products, to ensure the effective supply of agricultural products, especially grain, and to maintain the overall basic stability of goods prices," he told China's State Council, the government's highest administrative body, in remarks reported on television.

Most major economies would boost interest rates to fight inflation, but China tends to keep rates low and depend instead on industrial policy measures, including, in this case, incentives to boost farm production. It's unclear whether such measures can work rapidly enough to tamp down inflationary pressure.

Rising inflation has become a problem across fast-growing Asia, which has seen a huge increase in investment from overseas and which relied on big stimulus measures to fight the effects of the global financial crisis between 2008 and 2010.

Anoop Singh, the International Monetary Fund's Asia chief, said there are signs inflation is becoming a structural issue, reflecting underlying demand, not just a temporary rise in food or commodity prices. He urged Asian nations to boost the value of their exchange rates, which would reduce the value of imports, as a way to fight price increases. 

China is wary, though, of letting its currency appreciate more rapidly because it fears that would harm its thriving export industry. The value of the yuan has risen just 3.5% since June 2010 when China said it would let the currency float somewhat. Finance ministers and central bankers of the Group-of-20 nations meeting in Paris on Friday and Saturday are bound to press China on its currency policy. 

In China, food prices typically rise prior to the Lunar New Year holiday, which ended on Feb. 8, but January's price increase was intensified by adverse weather, including drought conditions. Non-food price rises also accelerated to 2.6% from 2.1% last year, indicating that inflation pressures are spreading through the economy. All the Chinese price statistics are calculated compared to year-ago levels.

Drought conditions are adding to rising food costs. The U.N. Food and Agriculture Organization issued a warning recently that at least five of China's major wheat growing provinces, which account for two-thirds of China's wheat production, are facing a severe drought.

In another sign of burgeoning economic activity, China's imports rose 51% in January, nearly twice as fast as it did a month earlier. Exports also rose sharply, by 38%. That narrowed China's trade surplus to $6.45 billion in January, down from $13.1 billion in December, according to customs data. 

Economists cautioned that China's trade figures are typically very volatile at the start of the year, due to distortions caused by the variable timing of the Lunar New Year holiday, which this year fell in the first week of February.

—Tom Orlik contributed to this article.