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Inflation Hits 12-Year High in China 

  • Naomi Martig

China's inflation rate has hit its highest level in 12 years, following a continued rise in food costs. As Naomi Martig reports from Hong Kong, China's leaders and political experts fear that inflation could spark unrest if it is not brought under control.

Chinese officials say inflation in China is at its highest level since 1996, at 8.7 percent. The level is worrisome, but even more disconcerting is a 23.3 percent jump in food prices last month, which caused the overall increase.

The country's statistic bureau says pork prices are up more than 63 percent, compared with this time last year. Fresh vegetables are up 46 percent and cooking oil is up 41 percent.

Prices have been rising steadily for months, pushed by rising demand and shortages of pork and grain. Then, severe winter storms this year in much of the country crippled the transport system and contributed to the sharp rise in February.

Peter Morgan, the chief economist for the Asia-Pacific region at the bank HSBC in Hong Kong, says Chinese officials are likely to take further measures, such as increasing interest rates and cutting bank lending, to try to ease inflation.

"We think there probably will be one more rate hike of 27 basis points (27 hundredths of a percentage point) which obviously by itself isn't that big. Also looking for further increases in reserve ratio for banks and also, I think, they will be attempting to curb prices at the micro level, trying to impose various kinds of price controls," he said.

Robert Broadfoot, the managing director of Political and Economic Risk Consultancy in Hong Kong, says the published rate of inflation understates the actual amount because of various subsidies on Chinese goods.

"There are subsidies on retail, on fuel prices, on a number of other commodity prices, and because of this intervention, it's a drain on China's fiscal resources and it's actually aggravating inflation around the world," he said.

He says, because inflation is concentrated in food, it could lead to public protests if it is not handled carefully. He says that sort of social unrest could be problematic for Chinese authorities as the Beijing Summer Olympics approach.

"How will the authorities respond to this? Are they going to increase subsidies and try to cover up the problem until the Olympics because they don't want to be embarrassed by demonstrations going into the Olympics. Or will they react with a stick and treat demonstrators harshly?" he asked.

In 1988 and again in the mid 1990s, inflation rates in China were around 20 percent, causing protests in several areas. Many political analysts say high inflation contributed to the public anger that sparked the massive pro-democracy demonstrations in Tiananmen Square, which the government crushed in June 1989.

In China, food accounts for about a third of most people's spending, and for the poor, it consumes half their incomes.

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