Frustration Builds Over High Food Prices In China

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Carlos Barria / Reuters

A woman buys vegetables at a local food market in Shanghai on Dec. 11, 2010

Students at the No. 2 High School in Liupanshui City of southwestern China's Guizhou province had endured rising living expenses for months. But on November 22, after a new round of food price increase — though a relatively minor one of no more than 50 cents per meal — they had had enough. More than 1,000 students gathered in school canteen, smashing windows and vandalizing the cafeteria facilities.

The event in Guizhou underscores a broader discontent over rising inflation across China in the past six months. According to a People's Bank of China survey released last week, the Residents' Price Satisfaction Index has sunk to an 11-year low of 13.8% in the fourth quarter of 2010, with 73.9% of the participants considering prices "unacceptably high," a 15.6% jump from the previous quarter.

The Chinese government set an official goal to keep annual consumer inflation under 3% at the beginning of this year, a target that looks increasingly out of reach as prices have continued to surge in recent months. The latest official statistics show that China's consumer price index (CPI) in November increased by 5.1% from the same period last year, marking the sharpest CPI hike in 28 months. Produce has remained the leading force for CPI increase; eggs are now retailing at over 5% higher than one one month ago. Maotai, a leading brand of a Chinese liquor, has announced a 12.5% increase in retail prices effective January 1. In southern China, an increasing number of mainland residents have been crossing the border to shop for daily necessities in Hong Kong; according to the state-run People's Daily, mainland Chinese consumers spent a total number of US$6.1 billion in Hong Kong over the first half of 2010, up by 40.8% from last year.

To curb inflation and stabilize commodity prices, on Nov. 20 China's State Council, China's cabinet, introduced a series of 16 measures, including increasing the supply and lowering logistic costs of agricultural produce, clamping down on profiteering, and subsidizing low-income families and university students. The State Council also demanded in a statement that "all government agencies and various levels of governments must realize the significance of stabilizing the market," underscoring a rare effort involving seven ministries to contain inflation. "The clear emphasis on the role of local governments indicates that the central government has confidence in controlling commodity prices," says Xingdong Chen, managing director and chief China economist at BNP Paribas Securities Ltd.

China's central bank also announced earlier this month that it would raise the bank reserve requirement ratio by 50 basis points starting Dec. 20, marking the third time in a row it has ordered to lift the ratio in 30 days, and the sixth time so far this year. Qing Wang, a chief economist for greater China at Morgan Stanley, predicts that China will continue to tighten its money policy in the near future by both increasing the reserve requirement ratio and interest rates.

According to Xinhua, China's state-run news agency, the government's policies have already made an impact; the average wholesale prices of vegetables have dropped since late November, and grain and cooking oil prices have been largely stabilized. But prices are still up from last year, and the public's frustrations, as the Guizhou high school protests indicate, have not gone away.

No matter how effective the government's suite of measures are in the short run, some experts maintain that food prices will remain a key issue in the battle against inflation. "I think the government policies to discourage profiteering and to manage expectations of inflation can only have a temporary influence," says Ben Simpfendorfer, a China economist at the Royal Bank of Scotland. "What's more important would be the policy to increase food supplies, and to reduce costs and provide fiscal subsidies for low income consumers."