China's inflation rate is climbing faster than expected, triggering a wave of price increases across the country and spurring foreign companies to search elsewhere for suppliers.
China's consumer price index hit 4.6% in December and 5.1% in November – it's highest level in 28 months. Annual inflation for 2010 was 3.3%, which is above the government's 3% target rate.
The Bank of Communications last week announced China's inflation rate would climb above 6% by midyear, pushed by rising food prices, labor costs and production expenses.
"China faces relatively big pressures on prices in 2011, especially in the first half. There are many factors driving up prices and inflation risks cannot be ignored," Bank of Communications said in a research report.
Beijing has raised interest rates twice and increased banks' holding requirements over the past year to try and rein in prices.
Central bank governor Zhou Xiaochuan said Sunday that inflation was rising more than estimated and the country might lift banks' reserve requirement ratios again to tighten the money supply.
"Inflation is still higher than many people expected. It may be still going up a little, so we should keep vigilant on that," Zhou said at a meeting in Japan.
China's inflation rate surge is affecting the prices of inexpensive clothing and retail products and slowing down U.S. imports as U.S. retailers try to negotiate down climbing manufacturer prices. Some U.S. and European companies have trimmed their shipments orders for spring due to higher product prices. The shipping industry is also suffering as container-shipping lines have had to cancel planned trips and reverse rate hikes due to the order cutbacks.
A survey last week by trading services company Global Sources Ltd. (Nasdaq: GSOL) reported that 54% of buyers plan on expanding their supplier base to Vietnam and India as China's prices continue to climb.
"Given the changing price point of China products, China exporters must work harder to market themselves and justify their higher prices in terms of service, product quality or production volume," said Craig Pepples, Global Sources' president of corporate affairs.
Vietnam-made apparel is 30% cheaper than China-made clothing, luring U.S. and EU-based retailers away from Chinese exporters. Thailand is also an attractive alternative with 30% of survey respondents saying they would increase sourcing from that country.
Luxury accessory company and U.S. retailer Coach Inc. (NYSE: COH) last week announced it was initiating a plan to shift its product reliance on China to other Asian nations like Vietnam and India. The company wants to reduce its China output to less than 50% from 80% now. The company said it would take four years to fully complete the shift.
The reduction in Chinese exporters' competitiveness could trim the $275 billion trade surplus the country has with the United States. China may decide to let the yuan, or renminbi, rise in value compared to the U.S. dollar to limit rising inflation.
Chinese economists last week warned China's People's Daily Online news outlet that inflation could be controlled this year but the country should watch out for stagflation. He Keng, deputy head of the Financial and Economic Affairs Committee of the National People's Congress, cited high inflation, property price bubbles and income gaps as issues threatening the country's economic growth in 2011.
Chinese consumers are facing frequent price boosts from companies and retailers that are compensating for rising costs.
McDonald's Corp. (NYSE: MCD) and Starbucks Corp. (Nasdaq: SBUX) have increased their sales prices for food and beverages in China. China's food inflation rate is up to 9%, according to Reuters. Rising food prices have been met with increasing public frustration over the government's lack of action.
"Public discontent is emerging in Asia's largest emerging economies, India and China, threatening to derail the region's growth prospects," Matt Robinson, a senior economist at Moody's Analytics, said in a report.
China put price controls on food in mid-November, but some state media have labeled those controls as ineffective.
China's property prices are the most disconcerting. Housing prices surged by more than 20% last year and are still climbing. The Chinese government last week raised the down payment requirement for a second-home purchase to 60% from 50%, and started experimenting with new property taxes.
"When you see the type of growth rates that these markets are experiencing, the whole area of inflation is one that really does need to be watched carefully," Denis Nally, chairman of PricewaterhouseCoopers, told Reuters. "It's one of the reasons that the number one threat to this recovery that CEOs are talking about is overall economic instability."
To offset rising prices for consumers, China's cities and provinces have started raising minimum wages. Popular industrial site Guangdong Province announced its cities will raise minimum wages by an average of 18.6% effective March 1. Beijing plans on raising pay 20% and Shanghai by 10%.
Some companies have tried moving their factories inland, where pay rates are generally lower than coastal cities, but the savings are often eroded by increased transportation costs.
News and Related Story Links:
- People's Daily Online:
Inflation high, China may tighten money supply
Inflation rattles corporates in China, India
- People's Daily Online:
Economists say inflation controllable in 2011, warn of stagflation
- The New York Times:
Inflation in China May Limit U.S. Trade Deficit
- Global Sources:
Rising China prices boost India, Vietnam sourcing