Inflation threat as China renews growth
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.
Frequently Asked Questions about this Article…
China's economy is growing again after a slowdown, but not at its former double‑digit pace. The government trimmed its growth target from 8% to 7.5% last year, and official data suggests actual growth is likely a little higher than that target rather than near previous double‑digit rates.
Yes — signs of inflation are reappearing. Official data showed consumer prices rose 2.5% year‑on‑year in December, the fastest pace since May. Economists cited in the article also say the true inflation rate could be considerably higher than the official figure because of methodological issues in how China measures inflation.
Producer prices are still declining but at a slower rate. They were down 1.9% year‑on‑year in December, the smallest drop since last May, indicating easing deflationary pressure at the factory gate even as consumer prices rise.
Economists point to several factors: rising consumer prices, increasing costs for rent, materials and labour reported by businesses, rapid growth in money supply over recent years, and strong credit growth that is powering construction. Early recovery price increases also suggest there may not be much unused capacity to meet rising demand quickly.
Total credit jumped 28% in December year‑on‑year. That surge in credit is helping to power a recovery in construction and is making it easier for businesses and households to borrow, supporting renewed activity in shops, factories and construction sites.
China’s imports are growing at less than half the pace of its exports, which means domestic demand in China is not expanding quickly enough to substantially pull the global economy out of its malaise. Slower import growth reduces the stimulus China can provide to trading partners.
Many retailers report stronger sales — for example, one merchant said business rose more than 10% in recent months — but they also face rising input costs. Shopkeepers and factory owners described double‑digit rent increases and higher prices for raw materials, which are squeezing profit margins because buyers may lack confidence to accept higher retail prices.
Yes, the article notes an emerging labour shortage, particularly of young workers. China’s one‑child policy and more years spent in school mean fewer young people are entering the workforce, which has reduced the economy’s potential growth rate compared with earlier periods of rapid factory expansion.
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