PILING HIGH: Price hikes for agricultural products are placing inflationary pressures on the Chinese economy

WANG PENG

On April 16, the National Bureau of Statistics (NBS) released the economic data of the first quarter for this year, which backed the tightening efforts of the government. Data show that China's gross domestic product (GDP) of the first quarter continued a rosy path as it ballooned 10.6 percent year on year to 6.15 trillion yuan ($878.4 billion). However, the growth rate was 1.1 percentage points lower than the same period last year.

NBS spokesman Li Xiaochao cited factors at home and abroad that are dragging the Chinese economy. Domestically, the snowstorms early in the year dealt a blow to the national economy. Internationally, the simmering subprime mortgage crunch in the United States and a fickle international financial market further saddled the world economy. Soaring prices for international raw products also cast shadows on domestic markets.

But Li waved aside worries that the slowdown was completely detrimental. "Through effective countermeasures, the national economy is moving forward steadily and rapidly, steered on a prescribed path of micro-controls."

Fine features

According to Li, Chinese economic performance in the first quarter was impressive with the following five features:

First, the overheating momentums of economic aggregate have been initially contained. Besides GDP, the growth of the added value of industrial enterprises above a designated size (annual revenue of 5 million yuan or $714,285.7) slackened 1.9 percentage points over the previous year. And by the end of March, China's increase of M2 (broad money supply), M1 (narrow money supply) and M0 (money in circulation) had eased 1, 1.6 and 5.6 percentage points year on year, respectively. "Softening economic growth conforms to expectations of the micro-controls," noted Li.

The second is the high quality of economic operations. As Li briefed, China's fiscal revenue edged up a year-on-year increase of 35.5 percent in the first quarter, 8.8 percentage points higher than one year earlier. Not counting the petroleum refining and cooking industry, nuclear fuel processing industry or production and supply of electric power and heat power, industrial enterprises above the designated size logged a profit growth rate of 37.5 percent, 6.1 percentage points faster compared with one year earlier.

The third is that economic restructuring is making headways. Li claimed that the added value of energy-guzzling industries posted a year-on-year growth of 14.8 percent in the first quarter, 5.8 percentage points weaker than the same quarterly period in 2007. Hi-tech industries escalated 16.8 percent in the added value, accelerating 0.4 percentage points year on year. Exports of some "highly-polluting, energy-exhausting and resource-based" products are taking a hit. Steel exports plunged 19.3 percent, reversing an 118.4-percent escalation in the first half of 2007. Exports of rolled steel and steel materials retreated 95 percent from a 98.1-percent upward march in the same period last year. In another move, exports of coke and semi-coke wilted to a plunge of 19.6 percent from a rise of 19.8 percent in the first half of 2007.

STRIKING A BALANCE: China sees improvement in its trade imbalance due to the rising yuan and narrowing external demand

ZHUANG JIN

The fourth feature is a correction of trade imbalance. In the first quarter, China's trade surplus shed 10.6 percent, or $4.9 billion. Its export growth to the United States decelerated 15 percentage points, and 10.3 percentage points, to the EU.

The fifth is improvement in the lives of the rural and urban population. Rural per-capita cash income and urban per-capita disposable income gained 18.5 percent and 11.5 percent, respectively, in the first quarter over last year. Besides this, 3.03 million people entered into the urban workforce in the first quarter, fulfilling 30.3 percent of the yearly target.

"These achievements have justified the micro-controls as correct, timely and effective," Li said.

CPI pressures

"Inflation has become the biggest barrier hassling the Chinese economy in recent years. The consumer price index (CPI) of the country has been bulging at more than 6 percent for five straight months and crept even higher this year," Li noted.

Data show that in the first quarter, China's CPI inflated 8 percent year on year, 5.3 percentage points higher than the same period of last year, and 3.2 percentage points higher than the whole of last year.

What worries economists most is that the producer prices of industrial products and purchasing prices of raw materials, fuels and power are also riding the upward trend.

"Hard pressed by price hikes of international raw products, domestic markets are confronted with mounting inflation pressures," Li said.

Li also pointed to the triple effect of 2007 as a culprit for the price hikes this year, which is projected to contribute 3.4 percentage points to the CPI growth rate of 2008.

This March, the Central Government vowed to cap the CPI growth under 4.8 percent for the whole year, which means that the CPI growth rate for the next nine months must linger under 4.2 percent.

This is obviously a thorny job, Li said. Behind the price rises are also other pushing hands. Producer price hikes are increasingly infiltrating consumer products. Beside this, swelling labor costs inflate production costs for enterprises, and eventually force up product prices. All these have added to pressures haunting consumer prices.

According to Li, the biggest advantage China can leverage to rein in price surges is its strong financial strength. In the first quarter, the fiscal revenue of the country leapt over 30 percent, a solid ground to increase transfer payments, amplify supplies and adjust the market.

Li pointed out that a prudent fiscal policy and a tightening monetary policy will persist to smooth the way for holding down prices.

As this round of price surges was ignited by agricultural products like pork and grain, support to agricultural production will be further intensified to alleviate inflationary pressures.

Li claimed that the Ministry of Finance has plunked down an additional 25.2 billion yuan ($3.6 billion) in direct subsidies for farmers for their agricultural production. While the grain reserves of the country remain abundant, live pig-breeding is recovering. In the first quarter, sales of live pigs and the total amount of bred live pigs inched up 1.9 percent and 1.6 percent, respectively. Large-scale pig-breeding is also gaining ground. Extensive pig-raising is also encouraged to increase the supply of live pigs.

Possibilities ahead

Li said that China currently finds itself in a sophisticated economic climate. The price surges are happening quickly while economic growth falters, and exports are tapering off while imports are picking up speed. This has added to uncertainties hanging over the development of the economy.

"The future economy may head in two directions," said Li. "The first is further contraction, as external demand may go even more anemic."

As Li expounded, the U.S. subprime mortgage fallout hasn't fully reared its ugly head. In other words, the woes of major economies take time to express themselves, possibly further denting the external demand of China. On the other hand, the restrictive policies on exports may bear more heavily on the economy. Worse still, the fast appreciation of the yuan and spiraling labor costs and raw prices are all likely to erode the competitive edge of Chinese exporters.

However, Li said that the Chinese economy still has chances to resume its lost ground, which is the second direction.

This is mainly because investments in fixed assets may see a rally. As the post-disaster reconstruction proceeds, the hard-hit links will become hotbeds chased by investments. Although some industries cash in less or even run a deficit, most record brisk profit growth and will absorb more investments, he said.

"China is currently awash with capital supplies, placing the investments on strong financial footing," said Li.

"Faced with a blurred outlook, China should align its micro-controls for both directions, so as to a prevent stagnation of economic growth and drastic price surges, as well as a rebound of the of economic growth rate. Nevertheless, it remains the current priority to rectify continuous price hikes," Li said.

Major Economic Data of the First Quarter

GDP: 6.15 trillion yuan ($878.4 billion), a year-on-year growth of 10.6 percent (see graph 1)

Foreign Trade: $570.4 billion

Trade Surplus: $41.4 billion (see graph 2)

Retail Sales of Consumer Goods: 2.56 trillion yuan ($365.1 billion), a year-on-year increase of 20.6 percent

CPI Growth: 8 percent

PPI Growth: 6.9 percent

Fixed Assets Investment: 2.18 trillion yuan ($312.1 billion), a year-on-year increase of 24.6 percent