CHALLENGES 2007-2008: Surging Inflation Worries China’s Leaders

By IPS Correspondents Reprint | | Print |

Antoaneta Bezlova

BEIJING, Dec 30 2007 (IPS) - For a former guerilla party that derives legitimacy by providing economic prosperity to 1.3 billion people, the revelation that Chinese Communist Party leaders, polled in a recent survey, saw surging inflation as the biggest threat facing them in 2008, was alarming.

A highly anticipated year of triumph for China – which hosts the Olympic Games in August – now looks increasingly fraught with economic risks. Unlike in the past when communist leaders dreaded that a sluggish economy might bring about social unrest, this time around economic risks come from rapid growth.

Chinese mandarins fear the economy is expanding too quickly, fuelling runaway inflation and poor investment choices that might cost them dearly in the future. Chinese enterprises across a range of sectors have poured money into expanding production over the past few years, driving up capacity, squeezing profit margins and forcing some to take out new loans to pay their costs.

After a decade of breakneck economic growth, Chinese leaders declared in December they were ready to shift from a “prudent” monetary policy to a “tight” one to prevent the economy from overheating. What is more, the Central Communist Party School, which polled party leaders across the country in the same month, released a survey showing they now feared rising prices have become a bigger social threat than corruption and income disparity.

The public seems to share the sentiment. An end-of-year survey by the central bank found that a record 65 per cent of households expected prices to go on rising next year, while the proportion that thought prices were already too high and difficult to accept jumped from 23 per cent, this time last year, to 48 per cent this month.

The grudge among ordinary people in Beijing is that the recent jump in prices from food to fuel, to housing and stocks is related to the Olympic Games next year when the government wants to present a first-rate city to the world.

“Life in Beijing is no longer possible for people who earn little,” says disgruntled Cui Baoxing, a state company employee who takes 2,000 yuan (272 US dollars) home every month.

“Because of the Olympics we have been told to move out of our house to make way for a new road and because of the Olympics we can’t afford to buy into any of the new apartments they offer us because the prices are too high. It is so impossibly out of reach for us.”

The hosting of the Olympics by China continues to be seen as a national high point and many are immensely proud of the honour. But economic realities are beginning to bite hard. Some old Beijingers worry they might be forced to leave the city if life in the capital becomes unbearably expensive as a consequence of the Olympic event.

“After the fireworks are over, Beijing might be just a city of the rich,” ponders kindergarten teacher Sun Ronglei. “Who knows whether we can still survive here”.

China’s inflation rate reached 6.9 per cent in November, the highest in 11 years. The big contributors were food prices, which jumped 18.2 per cent, and fuel prices, which climbed 5.5 per cent as the Chinese government raised controlled retail prices for gasoline and diesel.

Some analysts continue to deny that stubborn inflation this year is a real factor, insisting instead it is a function solely of unusual increases in pork and other food prices, and expecting it to vanish as millions of piglets are born in 2008. But others have begun suggesting that inflation is a structural issue that would require draconian measures to be brought under control.

“In China once you have inflation higher than five per cent, you can’t just sit and watch it spread from food to other parts of the economy because the population concerned is so big,” says economist Zhou Qiren. “It would take a combination of interest rate and currency adjustment controls to bring it back to what is deemed acceptable.”

Indeed perceptions about what last year brought to China cannot be more different at the top and among ordinary people. In 2007, China became the world’s third largest exporter, its foreign exchange reserves surpassed 1.3 trillion US dollars and China’s state companies like oil giant Petro China created records with their public offerings on the stock markets.

But while official media has extolled China’s economic feats, ordinary people have felt the pinch. Since spring, prices of food essentials like pork, rice, flour and cooking oil have seen double-digit increases. Property prices have risen steeply too, making owning a house in first-tier cities like Beijing a dream for many.

While the capital now rivals top international metropolises with its luxury brand stores selling Prada bags and Cartier watches to the country’s emerging elite, the average Chinese has smaller purchasing-power than previously thought.

A new study by the World Bank released this month, which compared the buying power of citizens around the world, showed that China’s output was 40 percent smaller than previous bank estimates. The new figures essentially mean that China has around 300 million poor people, and not just 100 million as its government had stated before.