China unlikely to see high inflation
(China Business Weekly)
Updated: 2004-04-27 15:01

The author is a senior researcher at the National Bureau of Statistics.

China's overall price levels are likely to increase 2-3 per cent in 2004 despite partial price hikes.

During his report to the Second Session of the 10th National People's Congress in March, China's development planning chief Ma Kai, the State Council's Minister for the National Development and Reform Commission, outlined the country's plan for national economic and social development in 2004 and aimed to keep the macro price surge at around 3 per cent.

This is a realistic and achievable goal.

As far as energy is concerned, there is surging demand in China, but the supply will increase as well to balance it.

As the world economy steps out of recession and China continues to encourage domestic consumption, the country's economy is likely to exceed the planned 7 per cent growth rate. At the same time, the country's heavy industry sector, a big consumer of energy,will keep expanding at a fast pace. The rapid growth will inevitably exert a heavy demand for energy.

The Chinese Government has kept a close watch on industrial overinvestment and redundant construction, especially in the cement, aluminium and steel sectors. The country has taken necessary measures to slow down excessive investment. The growth rate of fixed-asset investment is likely to be slightly lower this year than last year. However, despite all the government's efforts, it will still be relatively fast considering the overall economic momentum and large amounts of unfinished construction left over from last year.

But energy prices in China are not likely to bump much higher, because domestic supply is also increasing.

In 2004, many energy projects will be completed and put into operation, which will largely increase energy production capacity.

2004 is the third year after China's accession into the World Trade Organization (WTO) and the country will keep its promise to further reduce trade tariffs, which will result in a larger import quota. Take oil for example. China's oil import quota was 1.66 million tons when it entered the organization, and China promised an annual expansion of 15 per cent.

The raw materials market will continue to be active this year and maintain an upward trend. However, the growth rate is likely to be lower than last year, at about 4 per cent.

Price hikes in energy and raw materials are pressing industrial companies to raise product prices because of higher production costs. But the rises are likely to be limited. Because of fierce market competition, it is very difficult for manufacturing companies to transform the higher costs into higher product prices. They will instead have to restructure and increase efficiency, otherwise they can only expect lower profits.

In China, more than 95 per cent of goods are oversupplied. The production overcapacity has restrained immediate consumer price hikes due to higher production costs. That explains why partial price increases are unlikely to lead to overall consumer price hikes.

This supply-demand relationship is unlikely to change in China this year.

Because more expensive production will unlikely result in higher consumer prices, there will be no serious inflation.

On the other hand,falling prices for some consumer products, such as electrical home appliances and clothing, will come to an end, because of the increased costs and a better market environment.

First, any further price cuts are unlikely because higher production costs have squeezed the manufacturers' profit margin.

Secondly, the central government's tax rebate reduction makes it difficult for the producers to expect big returns through exports.

The Chinese Government cut the export tax rebate rate by an average of three percentage points from 15.51 per cent at the beginning of this year, expecting to reduce the renminbi appreciation pressure and its financial burden.

Tax rebates used to play an important role for export-oriented companies. When a product price increase at home was impossible after price hikes in energy and raw materials, they would enlarge production scale, enhance new product development and then expand their international market. They would rely heavily on government export tax rebates to reap profits while keeping domestic prices unchanged. But now, they find it much more difficult to offset the increasing cost of production if they want to keep domestic product prices low.

Thirdly, sales in China are improving. It is expected that retail sales revenues this year will increase 10 per cent, one percentage point higher than last year.

Overall, consumer prices in China in 2004 may grow 2.5 per cent, or 1.4 percentage point higher than last year.

Prices for agricultural products in 2004 will increase, to various degrees, partly because of output reduction. Steeper price hikes in wheat, cotton and soybean are expected.

Historically speaking, it takes 2-3 years for food production to grow from undersupply to a supply-demand balance. And now the world's food reserve is at its lowest level since 1996. If China imports more from other countries, it will push the international market prices higher.

China's food prices are estimated to increase 5 per cent, which will push the consumer price index 1.4 percentage points higher.

Besides the overall supply-demand condition, import quota lifts and tax rebate cut, the country's monetary policy also matter. The banking authorities last year tightened lending to the real estate and auto sectors. This move increased commercial banks' deposits in the central bank by 1 percentage point last October, and by another 0.5 percentage point last week. The controlled money supply will also constrain prices from going up.

In conclusion, there is great pressure for a price hike, but there are enough factors to keep a balance. If the government adopts suitable measures, the price increase can be controlled to within 3 per cent, which the economy and society can bear. The government should also watch out for dramatic price jumps of individual products.

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