Time for China to act

Anyone who thinks that China's newest inflation figures are nothing to worry about must being suffering from a slightly delusional bug going around. That or they're buying into the 'stay calm' rhetoric being espoused by the Chinese government. Either way, this news is something that should be a cause for concern – but the Chinese government knows that, because it's been told.

In an exclusive interview with Business Spectator by ANZ head of China economics Li-Gang Liu, he made clear the risks posed by rising inflation, going so far as to name it as the number one threat to the Chinese economy, beyond trade stoushes with the US, which are inspiring some of the more colourful media coverage of China.

Rapidly rising property prices in China's leading urban centres have been well-documented, some might say ad nauseam, by both the Chinese and western media. Well-known China-based pundit Andy Xie warned Business Spectator readers in October last year that the bubble was getting close to dangerously perilous levels. While China has made moves to deflate the problem, there are other factors affecting consumer prices.

While the Chinese government blamed the February rise in food prices on the Chinese new year holiday, the potential for increases in cooking oil, meat and agriculture costs have been a cause for concern since last year. Similarly, factory-gate prices also quickened.

But David O'Rear, the chief economist of the Hong Kong Chamber of Commerce, said last month that the Chinese government would be watching inflation data and making some serious decisions about how to best manage rising prices. He told Business Spectator: "They're still on the edge of whether they should be stimulating or contracting and they're very concerned and so they start talking it out to try and discourage excessive borrowing without having to do anything.”

But it doesn't appear that just "talking it out" is going to work for the Chinese economy and further tightening, while previously likely, is now an inevitability. One of the biggest misunderstandings about the Chinese economy is the belief that it is a market-based economy. It isn't – it is managed by administration and market adjustment activities implemented by the Chinese government; which are more effectual and quicker to be felt than free-market economies, where various forces must play out.

For this reason, there is some truth in Scoreboard columnist Adam Carr's more level-headed reaction to China's CPI data released yesterday – he noted that "fears of an imminent economic collapse are baseless". Sure, imminent collapse is not likely. But rising consumer prices are a serious threat, both to the economy and economic management, but also to social stability for the foreseeable future; and the Chinese government can and will act on the basis of the figures released yesterday.

Ordinary Chinese people in China's big cities are already finding it difficult to keep up with rapidly rising property and food prices. The Chinese government will risk rising levels of social unrest unless it moves to tighten monetary policy and take its economy off the rapid boil.