COMMENTARY
Commentary: Inflation in the Year Of The Pig
September 20, 2007
Christopher Bjorke, AFP

We are living in the year of the pig, according to not only the Chinese calendar but increasingly to the Chinese pocketbook as well.

The pig as an astrological symbol is admired for qualities such as honesty, modesty and patience. The pig as an animal is admired for being delicious. The problem for the Chinese is they face a pork shortage while more people can afford to eat it more often, thanks to the growing economy.

The government has responded by allocating $200 million to increase pork production, but meat prices have still surged at a year-on-year rate of 49.2%, according to the National Bureau of Statistics.

So go China's efforts against inflation. Growing liquidity has accompanied a 6.5% rise in the consumer price index, the fastest rate since 1996, and Beijing is applying whatever it has in its toolbox of controls to keep rates down.

Good moves, so far

The World Bank issued a warning on inflation pressures in its China Quarterly Update, released Sept. 12. While "higher inflation has been concentrated on food prices," the report advised that "excess demand pressures need to be avoided" to keep price increases from feeding more general inflation.

News reports in recent weeks have shown Beijing approaching the threat from several sides:

• The People's Bank of China (PCOB, the central bank) raised key interest rates by .27%, effective Sept. 15. The one-year yuan lending rate is now 7.29% and the one-year deposit rate is now 3.87%.

• The PCOB raised reserve requirements by half a point, meaning that banks now must hold at least 12.5% of their assets in cash.

• The central bank loosened limits on overseas investments, allowing companies to direct liquidity beyond China's borders.

• Certain government ministries have been ordered to monitor and control price increases. Prices on government-controlled goods and services will stay the same at least until the end of the year.

These steps show that authorities are sensitive to the risks of inflation and are willing to take action to mop up excess liquidity. However, the World Bank report also recommends some changes that get at the fundamental structure of China's export-led growth: reducing its trade surplus, moving toward a more consumer-driven and less foreign investment-dependent economy, and allowing the yuan to appreciate.

Following the World Bank's advice would mean a shift away from the strategy that has produced growth that is projected to be 11.3% this year and that has made China one of the world's largest economies. Beijing has made some smart moves so far, but instituting more long-range plans to put the country on a path to stable growth could make the year of the pig memorable for more than just the rising price of pork.

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