China in grip of inflation
Amid hard times, leaders trying to reassure citizens
By Evan Osnos
Tribune foreign correspondent
November 25, 2007
BEIJING
When the prime minister of China, the mayor of Beijing and a throng of well-clad aides tromp into a muddy Beijing alley, people pay attention.
And not just residents, but economists around the world.
Prime Minister Wen Jiabao and his entourage set off into Beijing's back streets one morning this month, in search of "genial informal discussion" with "people facing hard times," as the state press put it. His visit was intended to broadcast the government's commitment to defusing the leading complaint on the Chinese street this fall: inflation.
The highest inflation in more than a decade is frustrating citizens and unnerving political leaders who are mindful that rising prices have been a volatile factor throughout Chinese history. China's inflation is also a growing international concern. For years, cheap Chinese imports have helped control inflation in the U.S., but if Chinese exports get more expensive here, they could, in turn, drive up inflation abroad.
Investment concerns
On another economic issue of foreign interest, China's top trade envoy on Friday sought to ease concerns abroad that Beijing is restricting foreign investment to protect its companies. Vice Premier Wu Yi's comments reflect complaints by foreign companies that China is limiting investment in certain industries, despite free-trade pledges.
"The position of the Chinese government to value FDI [foreign direct investment] and attract more foreign capital won't change," Wu told an audience at an American Chamber of Commerce in China dinner. "China's door will be open forever."
At home, China's economic policymakers are seeking to defuse complaints not about limits on foreign investment but about the cost of day-to-day life.
The premier's much-photographed walkabout highlights a central dynamic in China's political balance: The public permits the Communist Party to rule without opposition as long as the regime continues to improve the standard of living. Indeed, facing 11 local residents, Wen said that ensuring a thriving country and prosperous population is "the party and government's duty."
China's consumer prices soared by 6.5 percent in October, compared with a year earlier, matching a rise in August that was the highest in 11 years. Housing is also on the rise, with home prices growing by a new monthly record of 9.5 percent in October despite government efforts to slow the boom. Driving the increase in day-to-day goods was a 17.6 percent leap in food prices, which draw particular ire in China because people spend a relatively high portion of household income on food. The price of pork, for instance, soared by nearly two-thirds in October, largely because of the pig disease known as blue ear, which has hit the Chinese countryside.
"I have to cut spending on non-essential food. My family is eating cabbage, potatoes and carrots every day," said Zhang Mei, a 46-year-old worker, filling her basket at the Triangle Free Supermarket in Beijing. "We have nowhere to complain. Where can we go? You don't even know where the gate [of government] is. If you have the time to complain, you better use the time to find another job."
The issue was grimly illustrated earlier this month when three shoppers at a supermarket in the inland city of Chongqing were killed in a stampede of customers fighting over bottles of specially priced cooking oil. The discount of 20 percent amounted to $1.50 a bottle.
In 1989, inflation was also one of the factors that drove demonstrators into Tiananmen Square.
Economists and executives in China say the increases reflect soaring prices worldwide for oil, grain and other commodities. Those price spikes are rippling through the production chain with no obvious end in sight.
"For us, chickens eat corn, and petroleum products make the packaging," said James Rice, chief of China operations for Tyson, the world's largest meat producer. "Nothing is coming down and, if anything, it's going to get worse."
How far will it go?
China-focused economists are divided about how far inflation is likely to go. Stephen Green, a Shanghai-based economist for Standard Chartered Bank, said he doesn't expect China's inflation to spiral out of control and affect global markets, but that doesn't assuage the anger of Chinese consumers feeling the pinch.
"The only thing that's moving up significantly is meat prices," Green said. "If you're in the urban areas, your income has been going up 5 or 10 percent a year, so you got used to being able to buy more meat and more food, but all of a sudden that's not the case."
So far government efforts to stabilize prices have not solved the problem. In September, the government barred price increases on a wide array of items under state control, from electricity to parking. Regulators have also raised interest rates five times this year and may do so again before year's end, but those steps have produced little effect.
Moreover, economists suspect that prices are likely to climb still higher before the end of the year. The September price controls prevented refiners from passing on higher crude oil prices to consumers. Refiners simply cut their production of gasoline and diesel, leading to long lines at the pump and a new round of complaints.
Chinese authorities had no choice but to relent. They permitted an increase of about 10 percent in the price of gasoline and diesel. And that, manufacturers say, is likely to push up the price of other goods -- extending the cycle of rising prices.
"It looks like inflation is here to stay," Rice said.
