TO THE POINT: China is becoming more expensive in many ways with rising prices for oil and dairy products, leading economists to conclude that the country has entered a period of inflation. Consumers' willingness to buy was deeply hurt by the plummeting stock market. China's textile exports decreased in the first two months of 2008, while many clothing companies were unprofitable because of the U.S. dollar's depreciation. A World Bank report says East Asian economies will maintain their high growth despite the global economic slowdown.

By LIU YUNYUN

Shrinking Textile Exports

China's textile exports to the United States dropped 17.6 percent in February-good news for homegrown American textile companies, but devastating news for their Chinese peers.

The textile export slowdown was mainly due to the U.S. economic recession, which prompted shrinking demand for clothing and other textile products. The continuously depreciating U.S. dollar has eaten up the meager profit of export-oriented companies, some of which had to file for Chapter 11 bankruptcy.

The textile industry association has already started a nationwide investigation on the predicament of textile-related companies. Internal policies to curb labor-intensive industries as well as the country's new labor law that advocates higher salary packages also add tremendous pressure to textile companies.

"Coupled with the rising raw material cost, the overall company cost rose 20-30 percent," said Gao Yien, Export Manager at Hangzhou Fulida Group Holdings Ltd., to China Securities News. "This year is the most difficult year for the Chinese textile industry."

Statistics from the General Administration of Customs showed China's textile exports grew a mere 5.7 percent in the first two months of this year, and the growth rate was 30 percentage points lower compared with the same period last year.

Before 2004, textile companies brought in the most foreign currencies of all industries. The proportion has decreased since then. Gao said his company now suggests that overseas clients pay in other currencies, but few agree. "Obviously, they can take advantage of the currency depreciation," he said.

Some textile companies say they will continue exporting their goods even if it means no profit, rather than giving up an important client. They are optimistic that the currency volatility will eventually pass, but in the meantime they say they cannot afford to lose clients who are their sources of bread and butter.

Economic Growth in East Asia

Economic growth in developing East Asia will drop by around 1-2 percentage points to about 8.5 percent in 2008 as a result of the unfolding financial turmoil in the United States and the resulting global slowdown, according to the World Bank's latest six-month review of East Asian and Pacific economies.

But despite the likely drop from recent double-digit levels, overall growth remains healthy across the region, and most countries are well positioned to navigate the global slowdown because of the investments they have made during the last 10 years in structural reforms and putting sound macroeconomic policies in place, the report says.

The report says East Asia, China in particular, is increasingly becoming a "growth pole" in the world economy. It acts as a counterweight to the slowing industrial economies. China, which is expected to see its economic growth slow from 11.4 percent in 2007 to 9.4 percent in 2008, continues to perform strongly because of rising domestic investment and increased consumer spending.

Part of the reason for the continuing buoyancy is that East Asian exporters have benefited in recent times from trade both within the region and beyond to markets other than the United States. The region has recorded export growth at levels as high as 17 percent for developing country markets outside East Asia.

"Domestic demand is now playing a much bigger role in driving growth in the East Asia region," said Vikram Nehru, the World Bank's chief economist for East Asia and Pacific. "East Asia has also been able to diversify its export markets so, even though there is a significant decline in demand from the United States, East Asia has been able to compensate by exporting larger amounts to Europe and to other developing countries."

But the report also warns that the real challenge for governments in the region is the inflationary effect of mounting food and fuel prices especially because of the harsh burden this imposes on the poor.

"While the subprime crisis will have its impacts-possibly on some countries more than others-the more immediate concern is that in virtually every East Asian country, inflation is climbing to uncomfortable levels," said Jim Adams, Vice President of the World Bank's East Asia and Pacific region.

From "Agflation" to Inflation

China is not the only country with soaring food prices. Food prices in other countries have all soared, most recently spurred by the 30-percent jump in the price of rice on the world market.

The word "agflation" refers to agriculture inflation. Like it or not, "agflation" is here. Pork prices, a trigger of this round of inflation, remain stable at a high level of around 28 yuan ($4) per kg, twice the price during the same period a year ago. The National Development and Reform Commission (NDRC), China's top economic planner, quickened its steps in approving price rise applications. On March 28, it allowed two dairy producers to increase their prices by 15 percent. Three days later, it gave its approval for a major edible oil supplier to raise its prices by as much as 30 percent. Further price hikes are highly expected in the market.

Though officials believe that the surge in the price of rice on international markets would not affect China, profit-driven rice trading companies might export more instead of fulfilling domestic demand. It will in turn prop up domestic rice price.

Tao Dong, Credit Suisse First Boston's chief economist of Asia-Pacific region, contends that "agflation" has already expanded and that China is about to enter a period of overall inflation.

The global situation for inflation is no better. Alex Patelis, an economist at Merrill Lynch, said in his March 26 report that "seven of our 10 indicators show bubbling inflation," and the inflation threat mainly comes from emerging markets. His report suggests the most worrying signs are tightness in the food and energy markets, surging money supply growth, repressed inflation in emerging markets, the reaction function of central banks and the continued central bank financing of the U.S. current account deficit.

Cutting Consumption

The six-month-long market slump has hurt the investors deeply, and 70 percent of them have decided to curb their spending because of their losses in the stock market.

The National Bureau of Statistics said consumer confidence dropped in the first two months of the year. Furthermore, a survey by consulting firm AC Neilson indicated that 70 percent of respondents said they would spend less money on recreation and meals.

Also in the survey, 43 percent said they would buy fewer clothes and 53 percent said they would buy fewer hi-tech products.

The stock market plunge has trapped a huge number of investors, while surging commodity prices have discouraged people's willingness to buy.

Consumption is considered one of the three pillars for gross domestic product growth. The others are exports and fixed asset investments. The global economic slowdown has already dragged down China's exports. If the country's level of consumption slows, the whole economy will suffer.

Numbers of the Week

1.12 trillion yuan

China's fund management companies, which operate 341 funds, reported a total profit of 1.12 trillion yuan ($160 billion) in 2007, four times more than in 2006. Equity and hybrid funds earned about 86 percent of the profit.

111.11 yuan

The price per share of China Shipbuilding Industry Corp., once the most expensive of all stocks, nosedived to 111.11 yuan ($15.8) from a peak price of 300 yuan ($42.6). There were only five other stocks whose share prices were above 100 yuan ($14.2) each.