Inflation threat as China renews growth

AFTER a sharp economic slowdown for much of last year, China's economy is growing again - but not at its previous double-digit pace, and with signs that inflation might become a problem again.

Shops are crowded, construction sites show renewed activity and factories are hiring as exports and domestic demand recover - trends all underlined by government data released over the past several days.

Further data - including figures for industrial production, fixed-asset investment, retail sales and overall economic output - are also expected to show that the Chinese economy is expanding again.

Many shopkeepers are noticing a rebound in sales. Among them was Liu Licai, a merchant in southern China who sells curtains and other household goods. Although some industries - car manufacturing is one - still suffer from bloated inventories, retailers such as Mr Liu are starting to place more orders, keeping factories busy.

"Business has gone up by more than 10 per cent in the past several months," Mr Liu said.

Yet the pace of China's expansion may not be fast enough to do much for the rest of the world. China's imports are growing less than half as fast as its exports, making it hard for China to pull the global economy out of its malaise.

Until last year, the Chinese government set as a goal 8 per cent annual growth and the economy frequently delivered several percentage points more than that. Then last March, the government pared the goal to 7.5 per cent, and actual growth seems likely to be little higher.

"The potential growth rate of the economy has come down," says Stephen Green, a China economist at Standard Chartered. "You don't have to be in the double digits to get inflation."

Prices rose faster in December, according to government data released on Friday. Consumer prices rose 2.5 per cent from the level of a year earlier, the fastest pace since May.

Economists say the true rate of inflation is as much as double the official rate because of methodological problems in the way China calculates inflation.

Producer prices are still declining, but at a slower pace. They were down 1.9 per cent in December from a year earlier, the smallest drop since last May.

Early in an economic recovery, rising prices tend to be a sign that an economy may not have much unused capacity that can be brought into production quickly. Yet Wen Senrong, the sales manager of the Flying Gift Bag store in Guangzhou, said she was already seeing costs rise, with increases for rent, materials and labour.

"Our lease was renewed recently and our rent went up by a double-digit percentage - I feel like I am working for the landlord," she said.

Tang Chun, the owner of a factory that makes picture frames in Guangzhou, complained of rising costs for the range of supplies she buys, including aluminum, acrylic and glass. But store buyers lack the confidence to accept higher prices, fearing that they will not be able to pass them on to retail customers.

"Every possible cost is going up, including raw material costs and my rent, but I can't raise prices. It's all coming out of my profit margins," Ms Tang said.

Economists say overall rising prices reflect broad shifts in the Chinese economy.

China is awash in cash, since the government has expanded money supply over the past five years much more rapidly than the US, even though the Federal Reserve's moves have attracted considerably more international attention.

Powering a recovery in China's construction sector this northern winter is strong overall growth in credit, as businesses and households are starting to find it easier to borrow. Total credit jumped 28 per cent in December from a year ago.

Until the past several years, China seemed to be expanding its factories so fast and bringing workers into cities so quickly that it could sustain rapid growth just by fully using those factories.

But an emerging labour shortage, particularly of young workers, has changed that picture. The country's "one child" policy and more years spent in school have meant fewer young people entering the labour force even as the economy remains dominated by manufacturing.