International | Aug 14 2007
By Greg Peel
If there was one thing Chinese authorities were afraid of, it was that surging 11.9% economic growth would bring with it a consequent surge in inflation. As food prices have jumped across the globe, nowhere else have they been more felt than in China. This is particularly politically sensitive, as it affects China’s vast low income population most specifically.
China has been at pains to fight against the economic bubble, without actually forcing a hard landing. Interest rates have risen three times in the past six months, and one to two more increases are expected by year end. But when the currency is artificially pegged at an undervalued level, and real interest rates are negative, inflation is always going to be a problem.
From June to July China’s inflation rate jumped from 4.4% to 5.6% – the highest monthly rate since February 1997. Within that jump were a surge in pork prices of 45.2% and eggs of 30.6%. Pork is a staple of the Chinese diet.
The country has been suffering from its own version of foot & mouth. Pigs have suffered from an outbreak of blue-ear disease and thousands of animals have been destroyed by authorities. However, pork (and egg) prices have also been affected by higher feed prices, which in turn have been driven by surging global grain prices. Chinese pork is a victim of the US subsidy of ethanol.
A Chinese statistics bureau spokesman tried to put a brave face on the inflation increase, noting that the problem was only really in food. Prices in clothing and other non-food goods have risen only 0.9% from July last year. Industrial product prices and services prices remain relatively stable, and the bureau is not expecting overall prices to rise sharply. Consumer prices year to date rose 3.5%.
Chinese authorities are providing free vaccination against blue-ear, but are also making investigations as to whether the food price surges may involve any price collusion amongst farmers and food companies.
The government cannot afford to allow the Chinese economic machine to roll on and create a western-style, ever-widening gap between the new haves and the disadvantaged have-nots. China is not a stranger to the odd revolution.
FNArena has reported in the past that even the most bullish of equity market analysts suggest that if one thing could derail the bull run (even including a credit crunch) it could be high food prices in Asia.
