The Chinese government has stepped up the rhetoric and outlined possible ways it could control inflation, especially food price cost pressures.
The moves, rumoured for a week, are important to countries like Australia because they indicate inflation is now being treated as the big issue for the economy, with growth and associated activities very much relegated to the bottom of the list.
The crackdown and mooted controls have been rumoured since late last week when the CPI for October revealed a sharp jump in the cost of living in October.
The CPI jumped 0.7% from September to an annual rate of 4.4%, driven by a 10.1% rise in food prices in the month.
Food prices are up 62.5% in the past year, according to Chinese reports this week.
The news of the so-called ‘administrative actions’ also raises the odds of a nasty hard landing for the economy, compared to what was looking likely a month ago.
With Australia-China trade (exports and imports) heading for a record $A100 billion in the year to next June, this raising of inflation is very important to us and the Reserve Bank, as well as the federal government and a host of companies from BHP Billion to the ANZ Bank and Woodside.
An ostensibly "routine" (how Reuters described the meeting) of China’s State Council late on Wednesday night released a statement that contained some of the possible measures and approaches the government looks like adopting.
The State Council announcement came after another bad day on the sharemarket in China on Wednesday with the main Shanghai market now down around 11% since last Friday on fears about the impact of inflation and the policy changes to control it.
That took the Chinese market into a correction phase after its sharp run up from July.
The statement and comments from premier Wen Jiabao (who is back in the limelight after vanishing for several weeks after making comments on democracy) tell us a lot about the level of official concern about inflation and the damage it can do.
Up till now the comments have been from ‘experts’ or strategically placed stories on official websites like The People’s Daily or Xinhua pointing out what the government could do, talk about a ‘one-two’ knock out blow against inflation, confirmation of a 62% jump in vegetable prices in the past year (and more than 80% for ginger and garlic) and talk about making official more responsible.
Besides chairing the State Council meeting on Wednesday, Chinese TV and media carried reports of Premier Wen touring southern China and expressing concern about rising food prices and promising government action.
Stage managed it must be, but that doesn’t disguise the stepped up level of worry in official China about inflation and the dangers it brings for the country and for the Communist Party.
The Xinhua story was buried on the China page and was a one line link to a large report, using the same picture as a previous day’s story about how China would use liquidity to tame inflation. Official China is very concerned, but doesn’t want to look out of control to the rest of China.
Now it’s direct, straight from the highest levels of the government and the master of day to day government in the country, the State Council.
That it was raised at this level and comments made afterwards means the ruling Communist Party and its various committees are driving this approach.
The State Council decided that it would stabilize prices for grain, oil, sugar and cotton in particular, according to a statement on a government Web site.
The statement said the Council’s measures would aim to increase the supply of commodities, especially food, that have driven inflation to a 25-month high.
It also vowed to intensify a crackdown on price speculation and to punish those found hoarding commodities and pushing up prices by illegal means.
"We need to understand the importance and urgency of stabilizing market prices and take forceful measures," the statement said.
"When necessary, temporary intervention measures will be implemented on prices of some important daily necessities and production materials."
The State Council also said that the government would make sure that more diesel reached filling stations to fuel trucks, and that utility power stations had ample supplies of coal.
The high prices and relative scarcity of diesel fuel have resulted in part from its use by factories, which have been burning it in backyard generators as power companies have cut back electricity generation to meet national targets for limiting energy consumption and cutting emissions. (Rather self defeating)
The power companies have found it increasingly tougher to secure enough coal because the government requires coal mines to sell it to power companies at low, regulated prices and the mines want to sell it at higher prices on the open market. (Exporting is out at higher prices because of the permits needed to ship coal out of China.)
The central bank boosted interest rates by 0.25% on October 19, then last week ordered commercial banks to put more of their assets in low-yield accounts at the central bank.
That was the 4th increase this year ordered in the asset reserve requirement, which is an attempt to cool bank lending and property spec
