China’s sharp jump in food prices fuels inflation fears

After a run that has seen sizzling growth top 10 percent for four years, analysts say China’s supercharged economy is facing strains that could break out into an upsurge of inflation.

So far the worst damage has been confined to food prices, which jumped 15.4 percent in July over the same month a year ago and drove overall inflation to a decade-high 5.6 percent. But wages are rising too, as are the costs of oil and electric power. Record-setting exports and a stock market boom are sending cash flooding through the economy, stoking demand for goods.
The Chinese economy “might have entered a region where we should be on guard,” said a central bank official, Zhang Tao, quoted last week by the state newspaper China Securities Times.

If the trend goes unchecked, the impact could be felt abroad as consumers who depend on China as the world’s low-cost factory have to pay more for appliances, shoes and other goods. Pinched Chinese consumers might spend less on foreign goods, widening a yawning trade surplus that has strained relations with Washington and other trading partners.

Economists say the latest price spike is due mostly to temporary shortages of pork, the staple meat whose price soared 86 percent in July from a year ago.

Pressure is growing in energy, where Beijing is holding down retail prices by blocking state-owned gasoline and power companies from passing on higher costs, said Nicholas Kwan, an analyst for investment bank CLSA in Hong Kong.

Chinese oil refiners are losing US$5 (€3.50) per barrel of oil that they process into gasoline or diesel, he said.

“I think it’s just a matter of time until they have to bite the bullet and raise domestic prices,” Kwan said. “Otherwise they risk an artificial shortage because oil companies will refuse to refine oil into gasoline if they are losing money.”

International Herald Tribune