China's inflation highest in 11 years

Discussion in 'Economics' started by crgarcia, Feb 19, 2008.

  1. China's inflation highest in 11 years

    HONG KONG (CNN) -- China's consumer prices hit another 11-year high in January, stoking fears the country could start exporting inflation and signaling an end to the days of ultra-cheap Chinese goods.

    Devastating snowstorms in China have worsened food shortages, setting back efforts to cool rising prices.

    "We are taking for granted that China will provide cheap products forever. But I think we are probably about to see the end of an era," said Dong Tao, an economist with Credit Suisse in Hong Kong.

    "China is exporting inflation in a big way. The rest of the world will feel that."

    China has been exporting the opposite -- deflation -- for more than a decade. The country is a manufacturing machine, with Chinese factories churning out everything from T-shirts to television sets for ultra-cheap prices, helping to keep consumer prices down worldwide.

    Soaring costs of fuel, food, and raw materials, however, are now forcing some Chinese manufacturers to raise prices for their goods.

    PAQ Manufacturing, a Hong Kong firm that makes luggage for brands such as Samsonite at its Chinese factory, expects to increase prices "by around 10 percent at least," said company representative Calvina Chan.

    "The materials, the prices are increasing," she said. "Also, the currency keeps on rising."

    The Chinese currency appreciated by 7 percent last year and rose a further 1.9 percent in 2008 to 7.1623 yuan per dollar, according to Bloomberg. Morgan Stanley expects the yuan to increase by as much as 10 percent this year.

    Another major cost is workers' wages.

    Tao at Credit Suisse estimates Chinese wage rates for migrant workers, many of whom are employed at factories in the Pearl River Delta, have been growing by up to 30 percent every year for the past four years.

    With so many factories opening in the booming manufacturing area, companies have had to compete for workers by offering higher pay.

    Food prices have also pushed up wages.

    Surging prices of food staples such as pork have propelled annual Chinese consumer inflation from 6.5 percent in December to 7.1 percent in January, according to China's National Bureau of Statistics. That is the highest level in more than 11 years.

    Snowstorms last month -- China's worst in half a century -- disrupted transport and power and destroyed crops, exacerbating shortages of food and fuel and forcing millions of workers to go home late for the country's biggest holiday at Lunar New Year.

    Paul Yeung of Hong Kong toy maker GoldLok Toys says he worries some of his workers won't return to his firm's Chinese factory until mid-March.

    "We usually expect the workers to come back the end of February, but this time I'm not sure they can come back on time," Yeung said. "It may cause us to delay all the shipments for March."

    Other manufacturers are more concerned about the longer-term trend of rising costs.

    "There are about 70,000 factories in the Pearl River Delta today. Many of them are talking about reducing their workforce or even shutting down," said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries. "We expect more than 10 percent of these factories will be closed in a year or two."

    Some companies say they are exploring plans to move their factories inland to Hunan province or to other countries such as Vietnam.

    Lau also calls China's new labor laws, which went into effect Jan. 1, "a nightmare." The rules, he complained, make it difficult to hire and fire workers.

    Lau is advising members to upgrade their production by buying new equipment and technology instead of relying heavily on labor.

    Central authorities have been raising interest rates, tightening credit, and using price controls to rein in inflation.

    Hong Liang, an economist at Goldman Sachs, wrote in a research report that the inflation impact from the snowstorm may not have been fully reflected yet in the January inflation data.

    Liang said she expects the February consumer price index, which is scheduled to be released March 11, to be much higher than 7 percent and possibly close to double-digit levels.

    Liang said it is still too early to expect any policy loosening in China.
  2. Expected.

    Developing countries can't find where to invest all their export dollars, so inflation develops.

    Exported goods increased in price, but just a little bit; otherwise nobody would buy, since their products are of poor quality.