Chinese prices swell despite credit crunch

THE PRICE of food drove up Chinese inflation in June, with the consumer price index rising to 2.7 per cent in comparison to 12 months earlier, above the recent average.

Food prices rose by 4.9 per cent in the same period, contributing to much of the rise in overall prices. Rents also rose, adding to the increase.

Over the first six months of 2013, inflation has hit an average level of 2.4 per cent on the previous year, dragged up particularly by a 3.1 per cent rise in February. For the last six months of last year, inflation rose by two per cent on average.

The Chinese economy has recently suffered from a credit crunch, as the Shanghai inter-bank lending rate (Shibor) spiked, making access to finance more constrained for the country’s banks and businesses.

On the other hand, the producer price index (PPI) fell by 2.7 per cent, the sixteenth month of falling prices for factories.

Deflation among producers indicates that profit margins are likely to continue being squeezed. Forecasts for Chinese growth have been scaled back, with suggestions that the economy is expanding at a more modest rate.

Emily Nicol, economist at Daiwa Capital Markets, suggests that the higher inflation for consumer made stimulus to ease the country’s ongoing squeeze in credit unlikely. “Today’s pick up in headline CPI will make any easing of monetary policy over the near term more difficult. In fact, while our economists in Hong Kong no longer expect rate rises later this year, they still do not see a strong case for a rate cut either.”

The International Monetary Fund (IMF) also cut its expectations for Chinese growth again yesterday. It now expects 7.8 per cent growth this year, followed by 7.6 per cent growth in 2014, a reduction of 0.3 and 0.6 percentage points respectively since the organisation’s last estimate in April.

The IMF suggested that the Chinese economy must find a way to sustainably raise consumption in the future. Without higher consumption, it is unlikely that companies will see enough demand to raise their prices.