China's Inflation Fight Starts to Squeeze Consumers

Photograph by Feng Li/Getty Images

While Japanese leaders have been making headlines by trying to end years of deflation and achieve an inflation target of 2 percent, their counterparts in China have a different fight on their hands. Far from promoting inflation, the Chinese are fighting to contain it—and the battle may get rougher in the months ahead. Consumer prices in China rose 3.2 percent last month, up from 2 percent in January. For the first two months of the year (a better measure, since the long Chinese New Year holiday fell in February this year and in January last year), inflation averaged 2.6 percent, half a percentage point higher than the average rate at the end of 2012.

China’s inflation fighters are making their stand at the National People’s Congress, now under way in Beijing. The NPC, China’s parliament, last week unveiled a new inflation target of 3.5 percent, down from an earlier goal of 4 percent. That “reduces room for pro-growth policies,” Bloomberg economist Michael McDonough wrote on March 8. “A modest economic rebound in China is likely to push inflation higher as the year progresses, potentially threatening the new target.”

The renewed fight against Chinese inflation could hurt growth in an economy that is finally getting back in gear after nearly two years of sluggishness. GDP growth in the world’s second-largest economy shrank for seven quarters in a row until the end of 2012. In the fourth quarter, Chinese GDP grew 7.9 percent and optimists could look to that growth providing momentum into 2013.

A bunch of data released over the past few days provides reason to be concerned about China’s ability to stay on track. Industrial output in the first two months of the year grew 9.9 percent, the government said on Saturday. That sounds impressive but it is down from 10.3 percent in December and is much lower than what many economists had been expecting: A median estimate of economists surveyed by Bloomberg had industrial output growing at 10.6 percent. Similarly, retail sales grew 12.3 percent but economists had expected 13.8 percent.

We can expect more downbeat numbers in the coming months, according to Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong. As the Chinese government reforms the way it responds to changes in oil prices, end users are likely to face higher energy costs, he says. That’s good news for state-owned oil companies but bad news for consumers. “The new pricing regime will ensure profitability for both PetroChina and Sinopec’s refining divisions, while passing on higher energy costs to consumers to encourage them not to waste fuel,” Kwan told Bloomberg News. “Higher fuel costs should slow China’s GDP growth from 7.8 percent last year to the target of 7.5 percent this year.”

Economists at HSBC and Standard Chartered Bank aren’t as worried. Yes, the latest set of economic numbers “was a bit soft overall,” Wei Li, Stephen Green, and Lan Shen of Standard Chartered write in a report published today, “but we remain upbeat on China’s recovery.” They say the disappointing data for retail sales reflected new President Xi Jinping’s high-profile campaign against excessive government spending on banquets, gifts, and other goodies. With China’s housing market on the rebound and producers’ confidence on the rise, the Standard Chartered economists predict GDP growth this year should hit 8.3 percent. In a March 10 report, HSBC economists Qu Hongbin and Sun Junwei say February’s inflation spike will be “temporary,” thanks to falling producer prices. Qu and Sun see consumer price inflation falling below 3 percent in the coming months.

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