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Beijing wary as inflation climbs to a 12-year high

Construction workers eat lunch in Chengdu, Sichuan Province, yesterday. PHOTO: AFP

Soaring food costs drove China's inflation to its highest level in nearly 12 years last month, data showed yesterday, raising the risk of unrest as Chinese leaders prepare for the Beijing Olympics.

The 8.7 percent price rise last month exceeded forecasts and raised the likelihood of interest rate hikes or emergency steps by Chinese leaders, who already have imposed price controls on food.

The Chinese leadership worries about a political backlash if soaring prices erode rising living standards. Bouts of high inflation in the 1980s and 1990s sparked protests, a scenario it wants to avoid amid global scrutiny of China ahead of August's Summer Games.

Inflation was driven by a 23.3 percent jump in food costs, the National Statistics Bureau said. Such rises are especially worrisome to Chinese leaders because they hit the country's poor majority hard.

``I'm concerned that there will be demonstrations. The government must recognize this,'' said Robert Broadfoot, managing director of Political and Economic Risk Consultancy Ltd in Hong Kong.

Food price inflation "hits poor Chinese a lot harder than Chinese who have benefited from the economic boom," Broadfoot said. "When people already are marginal and just can't pay, they're going to demonstrate."

Economists say inflation should stay high possibly as late as May before it begins to ebb.

"China will find it difficult to meet the target inflation rate of 4.8 percent for the full year," Jing Ulrich, JP Morgan's chairwoman of China equities, said in a report to clients.

Inflation last month was China's highest since May 1996, when prices rose by 8.9 percent, Goldman Sachs said.

Overall inflation was up sharply from January's percent 7.1 percent rate. Economists expected a rise last month, but forecast a rate closer to 8 percent.

Beijing has raised interest rates repeatedly and is trying to boost food production to ease inflation pressure amid a boom that saw economic growth rise to 11.4 percent last year.

Those efforts were hampered when the worst snowstorms to hit China in five decades blanketed the south in January and early last month. The snows wrecked crops, killed farm animals and paralyzed shipping. Shortages of meat and vegetables caused prices to soar in snow-hit areas.

Prices began to climb in the middle of last year mostly because of shortages of pork -- China's staple meat -- and grain. But government data also showed pressure for across-the-board price rises is increasing as factories and households compete for resources.

Rapid growth in the total pool of money available for credit also added to pressure for prices to rise, Goldman economists Yu Song (宋宇) and Hong Liang (梁紅) said.

Inflation should "remain high at elevated levels in the near term even after the temporary weather-related impact dissipates," they said in a report to clients.

Song and Liang said they expect Beijing to respond by raising interest rates, tightening controls on bank lending and allowing the yuan to rise faster in value. That could help to cool inflation by narrowing China's swollen trade surplus and reducing the amount of cash flooding into the economy.

Among consumer goods, pork prices shot up 63.4 percent last month, compared with the same period the previous year, while fresh vegetables were up 46 percent and cooking oil 41 percent, the statistics bureau said.

In a bid to control inflation, regulators froze prices of gasoline, electricity and other basic goods in September. In January, food processors were ordered to get approval for any price hikes. Fertilizer prices have been frozen to protect farmers.

Subsidies to farmers have increased to encourage them to raise more pigs. Curbs have been imposed on grain exports to increase supplies available on domestic markets.

Wholesale data reported earlier also showed pressure for price rises in other areas is growing.

The cost of basic oil products jumped 37.5 percent jump last month while that for steel products was up 29.6 percent, the statistics bureau said on Monday. Food-related raw materials rose 11 percent.

Rising prices for iron ore, grain and other raw materials will squeeze Chinese companies' profits, raising doubts about their growth prospects, Ulrich said.

"The beneficiaries of higher inflation remain the resource suppliers -- many of which are outside China," she said.
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