China´s Inflation

Trade surplus and its effects

China’s trade surplus with the United States and Europe is a blessing for China, because it creates jobs in the manufacturing industry. As researcher Wei Kang wrote in 2006, this is essential, because some 200,000,000 redundant workforce will have to find employment right there, and in the tertiary sector (services), rather than in the primary sector (agriculture). China has seen a shift from the countryside to the factories for decades now, and, as Wei argues, this is essential if working people shall rise to average incomes.

China’s trade surplus with the United States and Europe is a blessing for these Western countries. It lowers prices for consumption goods, and keeps inflation at bay. It hasn’t to be Walmart, if you want to shop and get a lot of stuff for your money (merry christmas, by the way). It is a blessing for developing countries, too. Sometimes, anyway. You can see a big share of small Chinese trucks in Syria, for example. Syrians could never afford similar pick-up lorries from Europe. (Do European manufacturers have any on offer at all?)
You do see some Toyotas pickups in Syria, though.

China’s trade surplus is a curse for Western countries. Any need to elaborate? Please go to some American Congressman’s or woman’s website and see their cases against it there. (It has something to do with American jobs.)

China’s trade surplus is a curse for China. It is great to manufacture stuff and have others pay for it, sure. But it is now quoted as a main source of excess liquidity in China, as described by the Financial Times. The resulting inflation is often blamed on food prices. However, there is a real shortage of pigs and crops. Food prices rose by 18.2 % from last year, while inflation in general was "only" at 6.5% in October. According to the Financial Times of December 11, China’s authorities are even pondering export quotas.

This may sound surprising. But then again, the situation may demand it. Exporting is good for the laobaixing (老百姓, "ordinary people"), because it creates jobs. But it is bad for the laobaixing, because inflation is eating up their wages, or pensions. The Communist Party is in power and in control, but that doesn’t mean that it doesn’t need to listen when the nation complains. According to Time Magazine, the central government is encouraging local governments to raise minimum wages – Peking, Shanghai, Shenzhen, Guangzhou, and Nanjing have already done so. It isn´t overall inflation that worries the authorities most. It is the disproportionately rising food prices, as they hurt most of the people.

Minimum wages alone should have little effect on how Chinese exporters price their products for Walmart. How far these regulations are really put into practice is a wide-open question after all. But Chinese wages in general are rising, too. Time chooses a dramatic headline: "China’s Next Big Export: Inflation". But in the article, it quickly plays down this possibility. Productivity rises even faster, says a study quoted by the magazine, and as China is moving on to "more valuable manufactured goods such as automobiles", it will be such products in the future that will keep prices for imported goods in Western and Mideastern countries low, thus helping to check on inflation there. And some industries and countries will always take care of the production of classical cheap plastic slippers.

But for now, within China, inflation is a problem. The European Overseas Chinese paper OuZhouShiBao, in an article of December 6, blames it on food and property prices. Food is where everyone’s money goes – if their liquidity is excessive or not. Property in China is where much of excess liquidity goes.

Growth no longer the only thing

China has long worshipped GDP growth. There are still analysts who argue that "core inflation" was still around 1% only. But the central bank doesn’t agree. Rapidly rising food prices are no fun issue in China. Food isn’t just "the people’s heaven" (民以食为天), as a euphemistic classical proverb liked to say. It is a matter of survival.

That said, some of the driving factors of inflation are possibly already being settled by market mechanisms. OuZhouShiBao says that several big crop harvests have basically lead to a balance of demand and supply there, and that for manufactured goods, supply was exceeding demand.

This could be good news for some of China’s farmers (unfortunately, the beneficiaries will probably be mainly those who live close to the cities, but some trickle-down may also happen in the remoter areas where many farmers sell bulk crops to the state, rather than cash crops to private markets). As OuZouShiBao puts it, the "industry-backfeeds-the-countryside" ("工业反哺农业") policy may already be at work. The rising food prices are the costs which urban residents have to bear in the first place.

sources and related topics:

Hardcopy –
Ouzhou Shibao, 2007-12-06, p. 8: Can China´s rising prices be controlled?
(中国物价上涨能否控制?)

2007-12-14

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