Inflation Endangering Chinese `Dream' Spurs Wen Pledge to Rein In Prices

Premier Wen Jiabao’s pledge to stem inflation in China underscored forecasts for more interest-rate increases as a jump in food and housing prices risks sparking public anger.

Wen, in his opening speech to the annual National People’s Congress conclave in Beijing two days ago, said that reining in consumer and property prices is the nation’s top priority. That will be welcome to fruit vendor Song Zhiqiang, 56, of the southwestern city of Guiyang, who says: “My rent’s doubled in a year and my family’s food budget has increased to 3,000 yuan,” or $456, from 1,200 yuan.

Policy makers’ 4 percent inflation target for this year was exceeded by almost a percentage point in February, according to the median estimate in a Bloomberg News survey. Without higher deposit rates to encourage saving, and a stronger currency to ease import costs, the risk is that price pressures will keep escalating in coming months.

“The skew of risks is very much for an extended period of uncontained inflation,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “The danger is that inflation spikes as high as 10 percent in the third quarter, causing households tremendous pain and fuelling widespread social discontent.”

Photographer: Adam Dean/Bloomberg

Wen Jiabao, China's prime minister. Close

Wen Jiabao, China's prime minister.

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Photographer: Adam Dean/Bloomberg

Wen Jiabao, China's prime minister.

For their part, investors have signaled diminished concern that Wen’s government will tighten monetary policy so fast that it will hobble growth in the world’s fastest-expanding major economy. The benchmark Shanghai Composite Index of stocks has climbed in five of the past six weeks, closing on March 4 at the highest level since mid-November.

Boosting Rates

Additional increases in benchmark interest rates and banks’ reserve requirements may help to bring price pressures under control, Maguire said. Nomura Holdings Inc. forecasts 0.75 percentage point of interest-rate increases by year-end, along with gains in banks’ reserve ratios.

Wen didn’t set any lending target for banks. New loans topped a 7.5 trillion yuan ($1.1 trillion) ceiling last year and the central bank said Feb. 17 that it will develop a wider measure of credit growth and liquidity, including off-balance- sheet lending, local and foreign-currency loans, and bond and stock sales.

The key one-year lending rate is 6.06 percent after three increases since mid-October and the deposit rate is 3 percent. The yuan, described as “substantially undervalued” by the U.S., traded at 6.5686 per dollar on March 4.

Home Prices

“Exorbitant” house price increases in some cities are a top public concern, Wen told the thousands of lawmakers gathered in Beijing, adding that the government will curb speculation and “adjust and improve” real-estate tax policies. The budget for this year shows a 35 percent increase in spending on low-income housing.

With real-estate values climbing in the aftermath of the record credit boom unleashed during the global financial crisis, slums have emerged in cities including Beijing and Shanghai as migrant workers and cash-strapped urban youth seek an affordable place to live.

“My dream of owning a house is drifting further away because home prices have increased by a huge margin, outpacing my salary gains,” said Tao Jianyi, 32, an electrical engineer in Beijing. “The government has a lot to do to make homes affordable and within the reach of ordinary income earners.”

At the congress, official reports confirmed targets of 4 percent inflation and 8 percent economic growth for this year and showed that the nation will spend more on the internal police force than the armed forces.

Call for Protests

An online call for protests in China, inspired by uprisings in the Middle East, has highlighted the risk of social unrest. The government has deployed hundreds of police in Beijing and Shanghai after an open letter called for “jasmine” rallies, named after the January uprising in Tunisia that overthrew President Zine El Abidine Ben Ali.

Across the country, consumer prices rose an annual 4.9 percent in January as food costs jumped, while in Beijing, new home prices climbed 6.8 percent. In February, inflation was 4.8 percent, according to the median forecast in a survey of 22 economists. That number is due to be announced this week.

In his speech, Wen said that keeping prices stable is the “top priority in macroeconomic control” for this year and the government aims to narrow the widening gap between rich and poor “as soon as possible.”

“People in China are very unhappy,” said Huang Yiping, an economics professor at Peking University in Beijing. “Inflation driven by food prices is very destabilizing for the economy and society because it’s reducing everybody’s purchasing power and mostly it damages the welfare of low-income households.”

Growth Targets

Wen had already disclosed that the nation will cut its average annual growth target to 7 percent in the five-year plan running from 2011 to 2015 from 7.5 percent in the previous period.

While such targets are routinely surpassed -- annual growth averaged 11 percent in the past five years -- the new goal may signal that the government accepts that the expansion will moderate as part of reshaping the economy. Wen, who describes China’s growth model as “unsustainable,” aims to curb dependence on exports and investment and bolster consumer demand.

This year, subsidies for urban low-income earners and farmers and continued incentives for rural purchases of home appliances may help to boost spending, Wen said. The government plans more increases in minimum wages and to raise the income- tax threshold from 2,000 yuan.

‘Glacial’ Change

“We still only expect glacial changes in the composition of China’s economy in the coming five years,” said Shen Minggao, head of China research at Citigroup Inc. in Hong Kong. “In the past, numerous reform efforts were delayed or gutted on downside risks to growth and upside risks to inflation.”

In Guiyang, fruit seller Song’s expenses are surging at the same time as his sales have slowed because of rising prices, he said. The price of apples has leapt 40 percent from a year earlier to 7 yuan a jin (half a kilogram) and water melons are up 20 percent, he added.

“I want to bring my wife’s aging parents to live with us in the city from 100 kilometers away but we just can’t afford it,” he said. “Five years ago rents were cheaper and making money was easier.”

- Kevin Hamlin, with assistance from Zheng Lifei and Chinmei Sung. Editors: Paul Panckhurst, Peter Hirschberg.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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