01/16/2008, 00.00
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China starts to export inflation

The rapid increase in the cost of raw materials is pushing up the prices of export goods. The yuan has already gained 1 per cent over the US dollar this year. For many experts Beijing is letting the currency revalue quickly to cool the economy, but at the local level governments and enterprises want continued rapid economic growth.

Beijing (AsiaNews/Agencies) – The prices of Chinese manufactured goods are going up as a result of the rising cost for raw materials and energy, high domestic inflation (up 6.9 per cent in November and 6.5 per cent in December) and a faster appreciation of the yuan. After years during which Chinese goods kept world inflation low, experts now expect that the latest surge might lead to its acceleration.

“When China starts to export inflation, it will feed through the rest of the world,” noted Dong Tao, an economist at Credit Suisse.

Hong Kong, which receives most of its foodstuff and electric power from the mainland, is already feeling the heat. From food to furniture, wages to rent, almost everything is going up in the city.

The same will happen everywhere but price hikes will be masked slightly in some places like the United States and the European Union because manufactured goods account for a relatively small part of their consumer price index baskets.

Still other factors will contribute to rising Chinese prices. In January a new more stringent labour law took affect and it will surely push up labour costs along with higher food prices.

Since the start of the year the yuan has gained 1 per cent against the greenback. Last year it rose by only 0.2 per cent in the same period, 0.05 per cent a year before and 10 per cent from July 2005 to the end of 2007.

Jiming Ha, chief economist with China International Capital Corporation, expects the yuan to appreciate a full 10 per cent this year. In his view should this happen, China’s inflation would be reduced 0.8 per cent in the near term and 3.2 per cent in the long run.

Experts believe the government will do just that to cool the economy and slow domestic inflation because the steps it took last year (increasing reserve requirement of banks and raising the cost of money six times) failed to make a dent in inflation.

Fixed asset investment (FAI) in the first 11 months of last year rose 26.8 per cent from a year earlier, raising fears among some economists that the country’s boom is fuelling a build-up of excess capacity that could end in a pile of bad debt.

This is why at the end of 2007 Beijing repeatedly insisted that it would impose “tighter controls” on monetary policy and reduce bank lending.

The main target are “local officials [who] still prefer more investment rather than less and it’s really difficult to change that fact,” said Victor Shih, a Chinese politics expert at North-western University in Illinois, who spoke to the South China Morning Post.

In the last quarter of 2007 bank lending dropped but the “credit control will be relaxed as opposition from corporates and local government grows stronger,” said Tao Wang, chief economist at Bank of America in Beijing.

Local officials have been used to getting promoted on the basis of how fast their city or region grows, and only now do central authorities look at their record on the environment.

Yet incentives to spend run deep. Splashing money gives local officials more scope to bestow favours on businesses and boost their opportunities to enrich themselves. Indeed “there are a lot of intangible benefits to having a lot of investment in your local area,” Mr Shih said. (PB)

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