Photographer: Qilai Shen/Bloomberg

China's 2% Inflation Feels More Like 20% to Big-City Renters

  • CPI fails to capture the 27% home price surge in mega-cities
  • Central bank checks more gauges when making policy decisions

Project manager Yuan Fang says she’s cutting spending and working overtime after a 20 percent surge in the cost of both her Beijing room rent and her favorite Japanese lunch boxes. Civil servant Neo Zhu, who bought an apartment in the eastern city of Hangzhou 10 years ago, feels costs of everything from gas to food are stable.

Yuan is putting her savings into gold to protect them from inflation. Zhu is confident his extra cash will be protected in a fixed-income fund.

The contrasting perspectives underscore China’s two-speed inflation picture, where living costs are stable in much of the country but surging in the largest cities, especially when housing is included. The consumer price index rose 2.1 percent from a year earlier in December, while factory gate prices jumped 5.5 percent, data released Tuesday showed.

Once soaring housing markets in metropolises such as Beijing and Shanghai are factored in, it’s easier to understand why the central bank has switched to tightening mode even though the economy is slowing and the headline inflation gauge is well below the government’s ceiling. That policy shift triggered the worst collapse in bonds in almost a decade.

“For college graduates in Beijing or Shanghai, rental can take up 50 percent of their pay checks," said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, adding that what people spend on will dictate their inflation perceptions. "If you focus solely on the CPI, you wouldn’t understand why the People’s Bank of China can tolerate such rapid increases in bond yields.”

Surging property costs have lifted the cost of paying nannies, waiters and hairdressers in big cities. Yuan, 28, hasn’t been to the Japanese restaurant near her office for months, after it raised the price of a bento box to around 35 yuan ($5) from less than 30 yuan. She and her roommates paid 4,500 yuan a month for the three-bedroom flat in Beijing’s suburb before a rent hike in October took the payment to 5,500 yuan.

Her pain hasn’t shown up in the data -- nationwide rentals rose a mere 2.9 percent in December. Residential costs account for about 20 percent of CPI, covering rent and management fees but not buying an apartment, according to Oversea-Chinese Banking Corp. in Singapore. Food accounts for 30 percent of the basket, with the rest including communications, travel and services.

"China inflation is never really that accurate, and people have been criticizing it as underestimating price pressure," said Wang Qian, chief Asia-Pacific economist at Vanguard Investment Hong Kong Ltd. "Of course, people would want inflation compensation, they would expect the credit market to better price the risk premium to compensate for higher inflation."

The yield on China’s benchmark 10-year yield rose 50 basis points to 3.18 percent in the past three months.

Yuan is supplementing her 8,000 yuan a month salary with overtime and putting away a couple of thousand yuan each month to buy gold. "If I have the cash sit in my bank account, it won’t buy as much stuff in two or three years," she said.

Read more: China’s 2% Inflation Doesn’t Tell Whole Story as Yuan Slumps

Zhu, 34, doesn’t share that anxiety. He put most of his money in Yu’EBao, the nation’s biggest money market fund.

"I don’t see the value of spending too much time managing savings to beat the 2 percent inflation," Zhu said.

His views on living costs are reflected in food prices. While pork belly is far from stable, its current price of 31 yuan per kilogram is almost the same as in September 2011. The central bank has clarified that price fluctuations of a single commodity won’t sway monetary policy.

Yet regional divergences are factored in. Cities that saw soaring prices last year rolled out measures to cool the housing market, while smaller towns sought to spur demand for millions of unsold homes. Gansu province, a backwater region suffering poverty, saw consumer prices rise 1.2 percent in November, while Shanghai reported a 3.7 percent jump.

"Consumer inflation now doesn’t really require any monetary policy concern," said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc. "But the regional divergence asks for more targeted policies."

— With assistance by Xiaoqing Pi, and Carrie Hong

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