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China: Inflation increases and the economy is overheating

by 5m Editor
16 October 2007, at 8:34am

CHINA - This summer China has seen a significant growth in inflation, the highest to have been registered in the last eleven years.

The price index for consumption has undergone a growth of 6.5% this August, concentrated principally in the area of food provisions, which has seen a growth of 18% respective to last month, causing much anxiety among politicians. And as always, the increase in food prices affects the well-being of the population, hitting the less wealthy echelons of society especially hard. The reaction of the Stock Market has been immediate: Shanghai has fallen by 5.5% and Shezen by 4.4%, while the impact on Hong Kong has been less penetrating, with a decrease of 0.2% on the index of Hang Seng.

The rising prices in food provisions

According to the primary analyses, the increase in food prices is due to the excessive cost of pig meat, an industry which has been hit by a syndrome affecting to the respiratory and reproductive organs (the "blue ear" disease), which has led to the decrease in its distribution and to an annual growth in prices of pig products of around 49%.Pig meat hasn't been the only area in which prices have increased. In August the cost of eggs went up by 23.6% in comparison to the previous summer. Vegetables went up by 22%, while the price of oil went up by about 30%. The importance of these figures shouldn't be underestimated, given that food constitutes about 37% of total expenditure in urban areas.

The syndrome which has affected the production of pig meat isn't the only cause of inflation in China. It should also be taken into consideration that the price of cereals in the last year has undergone a growth of around 7%. Inevitably, something which has had a considerable impact on the costs of meat and poultry has been the swelling in prices of animal feed. The increase in consumer demand, following salary rises, constitutes another factor which reflects the figures relating to swift inflation and could damage one of the most appealing elements for investors into China, that being low labour costs.

Source: FreshPlaza

5m Editor