Monday 26 Sep 2022 | 03:08 | SYDNEY
Monday 26 Sep 2022 | 03:08 | SYDNEY

China’s inflationary environment

3 December 2010 14:49

Catherine Chan is an environmental lawyer and journalist in Beijing.

China's consumer price index rose 4.4% year-on-year from October – a 25-month high. Food prices are the main driver for the fastest increase in two years. Water rates have doubled, from 11RMB to 22RMB per cubic tonne, while fruit and vegetable prices have risen by as much as 50%, cutting into the average citizens' spending habits. 

Wage inflation and a labour shortage are also common themes here – the type of jobs that migrant workers are generally employed for (shop assistants, wait staff and hairdressers) are now advertised.

As people move to the big cities and move up through the ranks, yet more vacancies are created. This extends to white collar workers as well – it's not uncommon for members of the notoriously fickle 'post 80s generation' of young Chinese to change jobs after a number of months because a new opportunity has arisen that pays slightly better. Lawyers job-hop with alarming frequency, as those with the requisite English skills and the right contacts are constantly in demand. This constant job-hopping keeps the cost of living raised.

The potential for inflation-related frustration was seen when students at a prestigious military-affiliated high school in Guizhou rioted last week over price hikes in their school's cafeteria, where the price for MSG-laden slops and bottled water went up by 0.2-0.5RMB (three to seven cents). The school's principal has since informed the media that prices have been lowered back to their earlier levels, and the 'rioters' would receive 'criticism and education'. Netizen reactions have been predictably sardonic – 'Guizhou's students are China's role models', wrote one wag.

China's central bank, the PBoC, has tried to control liquidity by sterilising money in the banking system through raising bank-required reserve ratios. A rise of 50 basis points in early November was announced, which locked up an estimated RMB 350 billion in the banking system. But as evidenced by strong gaming revenues from Macau casinos and record art sales in Hong Kong, there is still a lot of liquidity slushing around, with China's M2 (a measure of money supply) at just under US$10 trillion.

At the core of the inflation issue is the presence of negative real interest rates. With China's economy expected to maintain an official growth rate of around 10% (not taking into account China's massive 'grey' economy), the 12-month deposit rate is just 2.5%. So while putting money in the bank amounts to a losing proposition, property will continue to be seen as an inflationary hedge and prices will keep climbing. At some stage, the PBoC will have to start seriously increasing interest rates in addition to, or in place of, sterilising cash.

Photo by Flickr user tom.hensel.