Chinese Inflation Continues Unabated, Reported at 6.2% for September

By Jason Simpkins
Staff Writer

China had a 6.2% inflation rate for September, and can expect inflation to continue at that high rate for “a few months,” – despite renewed efforts to hold down the general level of prices – the National Development and Reform Commission, China’s top agency for economic planning, has reported.

The Bank of China has already raised its benchmark interest rate five times this year and instructed lenders to set aside larger reserves eight times. Still, an inflation rate of 6.2% isn’t much of a decrease from the 10-year high of 6.5% posted in August. Additional, and possibly larger, interest-rate increases will be required to soak up the rising tide of excess liquidity that’s washing through the economy, right now.

 “We don’t rule out steeper or more frequent moves if necessary,” central bank Chief Zhou Xiaochuan said last week. So far, attempts to rein in China’s blistering economy “haven’t been very effective,” he added.  

There are a number of factors contributing to China’s rising inflation. A ballooning trade surplus, skyrocketing pork prices, and oil prices in excess of $90 a barrel are all infusing the Chinese economy with excess liquidity.

Pork prices have nearly doubled since the start of the year, fueled by a shortage of pigs and by high feed costs. Pork prices have declined a bit recently, dropping 11% in August after government aid was provided. Beijing supplied $1.9 billion (14.6 billion yuan) in relief to farmers. 

The price of oil, which briefly shot above $90 a barrel last week, is also problematic for the Chinese economy.

Accoding to Zhou, “the high oil price has resulted in a surge of cash at oil-producing countries, and as a result, this large amount of funds is flowing around the world looking for investment opportunities. China’s excess liquidity is partly linked to a surge of cash in the world, which is partly contributed by oil producing countries.”

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The driving force behind inflation in China, however, is the nation’s burgeoning trade surplus. China’s weak currency has helped usher exports out of the country, resulting in a record $185 billion trade surplus in the first nine months of the year. That’s already more than the $177.5 billion surplus for all of 2006.

China’s central bank says it expects inflation to exceed the government’s 3% target. The inflation rate for the first nine months of the year was 4.1%, a 0.8% drop from the same period last year. 

“To lower prices will be an important task for our economic regulation,” said Zhu Zhixin vice chairman of the National Development and Reform Commission. “These measures may include exercising a monetary policy of moderate austerity, restricting excessively fast investment in fixed assets and to take measures to adjust prices.”

So far, China has resisted pressure to let its currency appreciate in value, instead favoring exports and economic growth as a priority. But the inflation situation is becoming more severe and token rate hikes of a fraction of a percent aren’t doing enough to keep the economy in check. The NDRC’s report may serve as a wake-up call to Beijing’s policy makers.

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