After food, China faces bigger inflation challenge

[November 18, 2010]  BEIJING (AP) -- After announcing steps to curb surging food prices that are stoking public anger, China's leaders face the challenge of also curbing inflation pressures that are simmering throughout the economy without derailing its recovery.

The double-digit jump in food costs that Beijing vowed Wednesday to tamp down is a symptom of widespread, growing price pressures, rather than the cause, analysts say.

They blame a flood of bank lending and say communist leaders need to hike interest rates and tighten credit before price rises in other parts of the economy pick up.

"The government needs to do a lot more than it was prepared to," said Standard Chartered economist Jinny Yan.

Wednesday's announcement highlighted the contrast between China, which recovered quickly from the global recession and is trying to cool inflation, and the United States and other major developed economies, which are trying to shore up growth.

Beijing said it would impose price controls if needed on basic food items, boost vegetable production, give food subsidies to poor families and release stockpiles of grain, cooking oil and sugar. That came after food prices in October jumped 10.1 percent over the year before, pushing inflation to a 25-month high of 4.4 percent.

Food prices are sensitive in a society where families spend up to half their incomes on food and communist leaders see them as a trigger for possible unrest. But the flood of bank lending that supported Beijing's stimulus also fueled real estate and stock speculation that pushed up housing costs at double-digit rates early this year.

At a Beijing market on Thursday, a 64-year-old retiree who would give only her surname, He, said she is coping by eating more low-cost cabbage. She said she has rented a garden plot outside Beijing to raise cucumbers and green vegetables.

"These vegetables are too expensive!" He said, pointing at a table loaded with tomatoes.

The latest government measures, full details of which are yet to be released, "will unlikely be effective in solving the underlying inflation problem," according to Goldman Sachs economists Yu Song and Helen Qiao.

"The rise in prices ... are the results, instead of the causes, of higher inflationary pressures induced by an overly loose policy," Yu and Qiao said in a report.

Until now, Beijing has used targeted tools to control prices of housing and other items while avoiding large across-the-board interest rate rises. Rate hikes are politically fraught because they would raise costs for state companies and heavily indebted local government investment agencies.

Wednesday's announcement made no mention of tighter credit, and Goldman's Yu and Qiao suggested that might be because such a step is so sensitive that it requires approval from senior leaders who were traveling abroad and unavailable.

Another potential anti-inflation tool is even more politically volatile -- allowing a faster rise in China's tightly controlled currency, the yuan, which would cut import costs. Beijing has allowed the yuan to gain about 3 percent against the dollar since June but has resisted pressure from Washington and others for a faster rise, which would hurt China's exporters and might cost jobs.

Private sector economists say Beijing might hike interest rates again this year following its Oct. 19 increase, its first since the crisis, and try to rein in credit by ordering banks to hold back more money as reserves.

That possibility has rattled Chinese stock markets, which fell this week on fears that tighter economic controls will further slow growth that declined to 9.6 percent in the three months through September, from 10.3 percent the previous quarter.

A sharper slowdown could hurt the global recovery by cutting into Chinese demand for iron ore, factory machinery and other imports from the United States, Europe and other economies.

Still, said Yan, "what could be more of a risk is inflation getting out of control. So in this sort of situation, we would imagine tightening is still the best thing to do."

A report by a government think tank this month suggested inflation might be even higher than reported because data fail to fully account for costs of services and housing.

China faced a surge in food costs in 2008 due to shortages of pork, a staple of the Chinese diet, which triggered price controls and quickly subsided. This year's price rises are spread across a wider range of goods.

Worldwide, prices of major food crops are up sharply from last year and further spikes are likely unless production rises, the U.N. Food and Agriculture Organization said Wednesday.

"It's overall inflation in a lot of categories of food. So how is the government going to work against that?" Yan said. "You can't stop prices from rising, especially given the global backdrop."

Another shopper at the Beijing market, Wang Haibin, said his family's grocery bill has risen by about 30 percent over the past year.

"We used to eat in restaurants whenever we liked," said Wang, a manager at a trading company, as he and his wife carefully picked out an eggplant. "But now we must choose to stay at home and cook more, because eating out costs a lot."

[Associated Press; By JOE McDONALD]

Associated Press researcher Xi Yue contributed.

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