03/11/2008, 00.00
CHINA
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Chinese inflation, at 8.7%, risks spinning out of control

A record rise in February. Food prices have risen by 23% in one year, and Chinese staple foods have more than doubled. Without immediate and effective intervention, discontent threatens to explode.

Beijing (AsiaNews/Agencies) - Inflation at 8.7% in February, the highest rate since May of 1996, and great concern about how to stop it.  The spike in prices was expected, after the serious problems caused by snow between January and February and the celebrations for the lunar new year, but it still exceeded the forecasts, and points to further rises in the near term.

Food prices have risen by 23.2% since February of 2007.  But pork, an essential food in Chinese cuisine, has risen by 63.4% in one year, vegetable prices by 46%, and cooking oil by 41%. Meanwhile, prices of non-food items have risen by only 1.6%.  Food prices make up only a third of the consumer price index, but according to economist Sherman Chan of Sydney, they are "more than 50 percent of . . . household budgets" for poor families.  There could now be demands for higher wages, with further inflationary effects.  There is also the fear of social protests that the government wants to avoid, especially during the Olympics in August.

Li Huiyong, an analyst in Shanghai, says that "There's growing concern that China's inflation is getting out of control". Now, says Gao Linghzi, an expert in Shenzhen, "This means further monetary tightening ahead. I think the government may raise interest rates further and accelerate yuan appreciation, which would hurt Chinese manufacturers".

Interest rates were raised six times in 2007, without decisive effects.  And other experts are afraid that a steep rise in rates would attract more foreign investment, increasing the availability of liquidity, with inflationary effects.  This is in part because the U.S. Federal Reserve is expected to cut interest rates to foster economic recovery in the country.

Sun Mingchun, an expert in Hong Kong, observes that "A rate hike does not help to increase the supply of food or the supply of pork", so its effects would not be immediate. (PB)

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