Chinese investors and citizens see hints of a past threat: Inflation

Pork is up. Vegetables are up. Gasoline is up. Even the official numbers, usually tame, are up.

Prices are rising in China — and that could complicate Beijing’s efforts to prop up a slowing economy and navigate President Trump’s trade war.

Chinese officials said Monday that an index of consumer prices rose in August for the third consecutive month. The increases are not particularly sharp, and Chinese economists point to a number of temporary factors pushing up prices, like floods that have damaged crops and a swine flu epidemic that led farmers to cull pigs.

Still, investors and the Chinese public alike are casting a wary eye on prices.

Angus Tong, a 37-year-old Beijing resident, said his landlord wanted to nearly double the rent for his family’s $1,200-a-month apartment. Rent already absorbs a third of his income and his wife’s, while the family’s monthly food bills have risen.

To save money, “we try to cook every meal at home,” he said, adding, “I think most middle-income people feel the pressure from rising costs.”

Higher prices could cause problems for Xi Jinping, the country’s leader. They would mean China’s leaders would have to be careful as they sought ways to bolster slowing growth, lest their efforts drive up prices still further. The trade war with the United States could also lead to higher prices for Chinese consumers and companies with tariffs raising the cost of imported goods.

“During the coffee breaks and the conversations, the topic of inflation is coming up,” said Tai Hue, the chief Asia markets strategist for J. P. Morgan Funds. “We’re starting to hear a lot more from investors. It’s just a question of the severity.”

For now, Chinese economists generally say there is little cause for alarm. “Disasters like the swine flu and disasters like the flood are not a very big impact on China as a whole, and are not a turning point,” said Li Xuesong, the deputy director of the National Academy of Economic Strategy in Beijing.

Historically, inflation has been a major political and economic issue in China, a consequence of a hard-charging economy as well as previous bouts of runaway lending by state banks. Both can set the stage for surging prices, and at times they have surged indeed. Inflation contributed to the 1989 protests in Tiananmen Square.

But for nearly a decade, inflation has been of little concern. Years of heavy investment left the country with overcapacity in practically every industrial sector, from coal mining to steel making to shipbuilding. That makes it difficult for companies producing those goods to raise prices. This could be ending, however, as China pursues efforts to pare overcapacity.

China has also invested heavily in education, so the productivity of workers has risen quickly along with their wages. As a result, labor costs for getting jobs done have changed fairly little, as higher-paid yet more-skilled workers complete tasks more quickly than lower-paid but less-skilled workers a decade ago.

That, too, may be changing over the long term, however, as China’s now-defunct “one child” policy and an unwillingness to have children lead to a shrinking of the labor pool.

China’s official inflation figures have been tame, but people inside and outside the country widely disbelieve them. Western experts contend that the country’s consumer price index broadly understates the effects of ever-rising housing costs. The index also understates a large number of lesser trends, including the shrinking size of meal portions in restaurants and changing fashions in clothing, they say.

Wigram Capital Advisors, an economic research group, has long calculated an alternative price index for China by taking government data on specific consumer goods and services and assigning them weightings based on actual household spending patterns in big Chinese cities. It shows that the annual rate of inflation jumped to 3.7 percent in August, from under 2 percent most of last year.

Check the Chinese term for “rising prices” on Baidu, a Google-like online search engine, and the mentions quintupled in the second half of August. But the use of a more intellectual term for “inflation” has changed little in recent months — a possible sign that most of the complaints about rising prices may be from less-affluent Chinese citizens who are more affected by higher costs for basics.

Officially, consumer prices were up 2.3 percent in August from a year before, the country’s National Bureau of Statistics said on Monday. Although marginally higher than economists’ expectations of 2.2 percent, that is still modest. But it represented a gradual acceleration from recent months.

Some of the factors behind China’s recent price increases look temporary. Wholesale prices for pork, the main meat in the Chinese diet, have climbed 17 percent since just mid-July, after an outbreak of swine flu, according to Agriculture Ministry data. Vegetable prices have climbed 21 percent since mid-July as flooding and a typhoon have damaged crops.

Goldman Sachs said last week that because much of the increase in pork and vegetable prices did not occur until late August, these increases would show up only partly in that month’s data, and then drive inflation higher in September.

Other price increases may linger longer. World oil prices have climbed sharply in the past year, and China is the world’s largest oil importer. China’s currency has slid in value against the dollar this year, and that drives up the price of oil further for Chinese consumers because petroleum deals are done in dollars.

Housing costs are also rising, for new homes and for rents. Rents were up an average of 17 percent in July from a year earlier in 50 large cities nationwide. While most Chinese people live in their own homes, renting had been a refuge for young people who could not afford high prices for new apartments.

China has also continued to pump more money into its financial system to support growth, adding to potential inflationary pressure.

Then there are the American tariffs, which could have a mixed impact. They raise prices for imported goods. But any economic slowdown in China that results from reduced exports to the United States could slow Chinese inflation, said Louis Kuijs, a China specialist at Oxford Economics.

China has ways to protect its consumers. It controls the prices of many essential commodities. For pork, it keeps several months’ worth frozen in what is called the strategic pork reserve.

The big counterweight to a broader rise in prices is that the Chinese economy is gradually slowing. Despite stepped-up government spending on infrastructure, a tax cut that is about to take effect and further monetary stimulus, that may continue. A broad rise in prices is less likely as long as the economy is weak, said Brad Setser, a Council on Foreign Relations economist.

If prices do rise more, however, then China may need to curb its local governments, which have shown an insatiable appetite for borrowing money to build ever more roads, bridges and industrial parks.

“Reining that in,” Mr. Setser said, “provides an obvious way of countering inflationary pressures.”
© 2018 The New York Times News Service