Inflation is less of a problem now than it was in the spring of

China Acts to Slow Rise in Food PricesBy KEITH BRADSHER
Published: November 17, 2010
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LinkedinDiggMixxMySpaceYahoo! BuzzPermalink. Facing an unexpected acceleration of inflation, the Chinese government announced Wednesday that it would take forceful measures to limit price increases for a wide range of foodstuffs and cotton, and that it would distribute additional supplies of fuel, for which prices are already regulated.

Higher costs of consumer goods in China have been confined largely to food and energy, and government policy makers want to keep it that way.

Over all consumer prices were 4.4 percent higher in October than a year earlier, the National Bureau of Statistics announced last week. Remove food and energy from the consumer price index, and prices for everything else were up 1.3 percent from a year earlier, according to the government.

Rising prices for food and energy are a global problem. But they particularly affect lower-income countries, where these necessities claim a much larger share of household incomes. The consumer price index in China assumes that food represents a third of a family’s spending.

The State Council, China’s cabinet of ministers, decided Wednesday that it would stabilize prices for grain, oil, sugar and cotton in particular, according to a statement on a government Web site. During previous bouts of inflation, like those in 2004 and 2005, similar promises to stabilize prices quickly led to detailed price controls.

The State Council said that the government would also make sure that more diesel fuel reached service stations and that power stations had an ample supply of coal. Factories have been burning more diesel in backyard generators as power companies have reduced electricity generation to meet national goals for limiting energy consumption. Power stations have struggled to buy enough coal because the government requires mining companies to sell its electricity to companies at low, regulated prices, and the mines prefer to sell at higher prices on the open market.

The State Council also ordered that local governments and other government entities provide temporary subsidies to help the needy cope with rising prices and that they increase allowances for needy students and student canteens, Xinhua, the official news agency, reported.

The government conspicuously did not announce any changes to monetary or currency policy. Western economists have suggested that China should raise interest rates to prevent the economy from overheating and that it should let the renminbi rise in value against the dollar to make it cheaper to import food, fuel and other commodities.

Shoppers and shop owners expressed mixed views about inflation in interviews Wednesday afternoon in Beijing, before the government announced plans to limit price increases.

A grocery stand owner said that while he had not seen an obvious increase in food prices recently, “the price has been increasing gradually over the years, and all of this stuff costs more than last year.”

A woman selling eggs at a Carrefour supermarket in Beijing said that eggs had risen to 1.2 renminbi, or 18 cents, each from 0.90 renminbi during the summer. At the supermarket’s deli stand, another saleswoman said that prices for processed foods were stable but that prices for fresh food were climbing quickly, with potato prices nearly doubling this autumn.

A nearby shopper joined the conversation, remarking that “the news said it is because farmers are holding potatoes from the market, just like the real estate market — that’s why the price is so high. It is not real.”

Inflation is less of a problem now than it was in the spring of 2008, when it peaked at 8.5 percent right before the global financial crisis began to hurt Chinese exports.

But Chinese leaders have repeatedly made it clear that inflation was a top priority because it could fuel social unrest, and they publicly have set a goal of not allowing the annual increase I in consumer prices to reach 5 percent again.

The central bank ordered commercial banks on Nov. 10 to put more assets in low-yield accounts at the central bank. The measure, an increase in the reserve requirement, was aimed at cooling a frenzy of lending in the last two years that has pushed prices for urban real estate out of the reach of most working-class families.

China rapidly expanded lending and the money supply over the last two years to finance an extensive stimulus program based mainly on huge investments in high-speed rail, airports and other infrastructure. Economic growth is so brisk that coastal export factories are struggling to find enough workers.

Extensive intervention in currency markets has also contributed to inflation in China, according to Chinese and Western economists. China has been effectively printing renminbi to buy $1 billion a day worth of dollars to keep the renminbi weak and give its exporters an advantage in markets overseas.

The central bank has been able to take some of these extra renminbi out of the system, but not all, by selling bonds to state-owned banks and requiring the banks to increase their reserves at the central bank.

Zhou Xiaochuan, the governor of the central bank, said Tuesday that China was under pressure from investors who were bringing dollars into China and buying renminbi. To prevent the renminbi from rising, the central bank buys these investment dollars as well as dollars pouring into the country from China’s trade surplus.

China’s self-sufficiency in most kinds of food, its trade surplus and its immense foreign reserves — which reached $2.65 trillion at the end of September — mean that it is better prepared than many countries to cope with rising world commodity prices.

The Food and Agriculture Organization of the United Nations warned Wednesday that food import bills had risen 10 percent this year for the world’s poorest countries.

“With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared,” said the organization, based in Rome.