BEIJING - It is
not unusual for an economy that is growing 10% a
year to have inflation as a companion.
Demand is strong for metals, oil and many
other production materials. The price of water,
power, gas and transportation is rising fast.
Meanwhile, real estate continues to boom in some
of China's major cities, at high-flying prices.
Is inflation rearing its head in China?
It may not be that obvious from the
official statistics: China's consumer price index
(CPI), the major inflation barometer, is still
growing at a mild rate, 1.2% in April and 1.4% in
May.
It is generally estimated the index
could pick up the pace in the
second half of the year and
extend to a 1.7-2% annualized growth in 2006, but
that is still quite moderate in the eyes of
economists. But retiree Zhou Lamei, who lives
in Beijing, believes prices are on the rise.
Apples, for example, a common fruit that used to
have a market price of 4-6 yuan per kilogram, have
doubled in price, and so have many other fruits
and vegetables.
Housing prices in Beijing
have also risen fast over the past year or so. Fan
Li, who works at a law firm in Beijing, bought an
apartment near the east fourth-ring road at the
end of 2005 for 7,500 yuan (US$937) per square
meter. The project now sells at about 9,000 yuan
per square meter.
But interestingly,
commercial houses are practically excluded from
the CPI components, as are many other services and
production materials, which help explain the gap
between CPI growth and the consumer sentiment
about price movements. So far, China's CPI is
still dominated by food.
Although CPI
growth has remained moderate since the start of
this year and is likely to maintain the trend
throughout the year, prices of many production
materials and assets have actually surged sharply
and will continue to rise, said Hu Shaowei, an
economist at the State Information Center, a
government think tank in Beijing.
The
authorities should be cautious about the rally of
asset prices instead of simply focusing on the CPI
trend and adjusting the structure of the overall
pricing scheme, he said.
Steady growth of
asset prices will produce bubbles that will twist
the pricing system and affect the efficiency of
the allocation of resources, Hu said.
The
authorities should pay special attention to
certain sectors such as oil, coal, power, metal as
well as land, housing, education and medicine and
give necessary guidance on the pricing standards.
The central bank is already closely
monitoring price trends to decide whether to take
more tightening measures.
To curb
excessive lending growth in the first few months
it chose to raise the benchmark lending rate by 27
basis points on April 28 and further raise the
reserve requirements for commercial banks by 50
basis points, starting from July 5.
The
State Information Center has just issued a report
suggesting further interest rate hikes for the
second half of the year. So did the Academy of
Macroeconomic Research under the National
Development and Reform Commission, the country's
top planner. The academy suggested the central
bank raise both the lending and deposit rates by
0.25 of a percentage point in a recent report. And
a Goldman Sachs report released yesterday
advocated an interest rate hike of 0.27 of a
percent point.
Insiders said the rate hike
is just a matter of timing and may be imminent.
The State Information Center predicted CPI
growth for 2006 would be somewhere between 1.5%
and 2%, while overall economic growth was
estimated at 10.4% for the year.
Zhu
Jianfang, a senior analyst with CITIC China
Securities, gave a more precise prediction of CPI
growth for 2006 - 1.8%. And many other investment
banks in Beijing agreed with this forecast.
It is expected that prices of crude oil,
metals and many other energy resources will
continue to grow in the second half of the year as
the economy expands rapidly and demand escalates.
Price increases of such raw materials will also be
gradually transferred to consumer products.
Generally speaking, China will face more
pressure from inflation than deflation in the
second half of the year, according to Shi Faqi, an
economist with Peking University. Though such
inflationary pressure will not be significant,
prices of many energy resources are already high
so there is limited scope for further growth, Shi
said.
Moreover, the government should be
able to control the prices of many monopolized
commodities, such as public services and
utilities, within a certain range.
