GOING UP: The country's high PPI growth may be transferred to CPI growth, and push up food prices for consumers such as these shoppers buying meat at a supermarket in Chongqing (HUANG HUO)

Ren said the high PPI growth could be transferred to CPI growth in several ways. First, it could be transmitted from prices of coal, refined oil and power to agricultural capital goods, affecting prices of farm produce such as grain, then be transmitted to food prices, and finally to the CPI. Second, the excavating industries' prices like coal and gas in the PPI could be transmitted to prices of water and electricity and then affect the CPI. Third, price hikes of raw materials in the PPI may push up the costs of industrial products, then affect their prices, and finally trickle down to the CPI.

But Ren also pointed out that in the present situation, not all PPI growth would be transferred to the CPI, since during this process much of the PPI growth may be digested. For example, among the different scenarios, the prices of water, electricity and gas for household use are determined by the government, which can control the range of price hikes by curbing the pace of price adjustments. Although the costs of industrial products are increasing, enterprises are hard pressed to raise prices and have to digest cost increases by themselves, owing to the ample market supply. Hence, only part of the PPI growth may finally be transmitted to the CPI growth, Ren said.

Although PPI growth is high, not all the growth may be transferred to the CPI, so that it would push up CPI growth only slightly, Ren continued.

Other economists believe that PPI growth will not be transferred to the CPI. Zhang Yongjun, Deputy Director of the Economic Forecasting Department of the State Information Center, said PPI growth might not affect the CPI soon. Since the CPI is directly related to retail prices, those prices have not been raised markedly, although the ex-factory prices of industrial products have increased. This indicates that wholesalers and retailers are digesting the pressure brought by PPI growth by themselves, he said.

Li Huiyong, a senior macroeconomy analyst at Shenyin and Wanguo Securities Co. Ltd., said the supply of consumer goods is still larger than demand at present, which limits the transfer of PPI growth to CPI growth. Every percentage point growth of the PPI draws up non-food prices by only 0.13 percentage point. PPI growth affects CPI growth mainly on a psychological level, and it could not change a situation whereby a decline of food price growth would cause a decline in CPI growth, he said.

The NBS figures indicate that the transfer of high PPI growth to CPI growth is very limited. Statistics show that from March, a scissors gap between increasing PPI growth and decreasing CPI growth had started to emerge. PPI growth surpassed CPI growth by 0.5 percentage point for the first time in May, then by 1.7 percentage points in June and by 3.7 percentage points in July. During this period, the increasing PPI growth did not cause the decreasing CPI growth to rebound. Li said this indicates that supply is larger than demand in the domestic downstream product market, and together with price controls for some intermediate products, the transfer of PPI growth to CPI growth has been weakened to a great extent.

Future tendency

Chen Yong, an analyst at Haitong Securities Co. Ltd., believes that the present PPI growth has reached the highest point and will drop in the near future. Major factors that previously pushed up the price of bulk goods on the international market, including strong demand, the weak U.S. dollar and international speculative capital, are gradually diminishing, and global economic growth is slowing down. On the domestic market, prices of capital goods are expected to drop continuously, so that there is limited room for PPI growth to rise in the future. Some 10 percent of PPI growth has reached the ceiling, he said.

Li Mingliang, another researcher at Haitong, said in light of the Chinese Government's macrocontrol policies and the overall economic downturn, future investment demand could be further curbed. He expects PPI growth to reach an all-time high in October.

But Zhou Tianyong, Deputy Director at the Research Office of the Party School of the Communist Party of China, has a different take on the situation. He said it was not certain whether PPI growth would continue to increase. Since China is discussing pricing reforms in some sectors, the tendency of PPI growth would be decided by the introduction of state policies to straighten out some pricing systems.

"For example, issues like the fuel tax and pollution discharge fees will be solved this year or next year," Zhou said. "If iron ore price on the international market remains stable or comes down and oil price also declines, the room for readjustment to power and coal prices on the domestic market will be larger, and the PPI growth will drop."

But the current situation seems to indicate otherwise. Because of the crisis in the America financial industry, the U.S. dollar continues to weaken, and many investors have started shifting their money from the stock market to the futures market, which seems to have more reliable returns now. This has led to another round of price hikes in energy and capital goods.

For China, continually decreasing CPI growth has provided room for the future adjustment of macroeconomic policies. But the PPI's record highs have added difficulties to government macrocontrol policies. Chen Dongqi, Deputy Director of the Institute of Macro Economy under the National Development and Reform Commission, believes that under the current circumstances, the government should pay attention to alleviating cost pressure from enterprises and boosting their enthusiasm for production in order to secure continued economic growth.

Chen told Beijing Review that the government should now consider speeding up tax reform. At present, corporate costs for raw materials, labor and environment protection measures are growing rapidly. If the government wishes to maintain the current level of economic growth, it needs to provide a better production environment for enterprises. The Central Government is now considering helping companies by reducing taxes, which might be a good solution, Chen said.

Besides tax reduction, the Central Government is considering other ways to give enterprises a boost, and some new measures may be introduced if the scissors gap between PPI growth and CPI growth continues to expand, Chen concluded.