Inflation bites where it hurts most - food

PUBLISHED : Monday, 21 April, 2008, 12:00am
UPDATED : Monday, 21 April, 2008, 12:00am

Retired state worker Guan Jingwen has a problem: although her small government pension payout has increased, the extra she receives has not kept up with the rising cost of her most basic expense - food.

The 69-year-old says the price rises have hurt so much that she has now given up buying fresh milk.

'Prices have risen too much since last October, from the initial 1 yuan increase a pack to 1.40 yuan or 1.50 yuan now,' Ms Guan said, while buying groceries at the Bonjour supermarket in Beijing.

'Now I have cut out buying fresh milk, but my children sometimes buy me some. The overall quality is deteriorating too - some brands are getting more and more diluted.'

Beijing's fight to beat inflationary pressure could be a drawn-out battle amid the economic consequences of the nation's worst blizzards in 50 years, and the threat of a global recession.

Last week, the government revealed that March's consumer price index rose 8.3 per cent, well above the 4.8 per cent annual rate that it has set for all of this year.

For the first quarter, the index rose to 8 per cent. Driving the increase was a 21.4 per cent rise in food prices last month. Pork and edible oil posted the biggest increases for the month - 66 per cent and 50.7 per cent, respectively.

Overall, China, the world's fourth-largest economy, expanded at a greater than expected 10.6 per cent in the first quarter of this year, compared with 11.2 per cent a year earlier. On the same day the government disclosed the numbers, the central bank raised its reserve requirement ratio for commercial banks by 50 basis points to 16 per cent.

Taming inflation is the central government's top priority as unchecked growth in prices hurts the basic needs and livelihoods of ordinary workers and a population already torn by a widening income gap.

According to the National Bureau of Statistics, cities registered an 8 per cent inflation growth last month while the rate in the countryside was 9 per cent.

But despite a slight easing in the rise of consumer prices from February's 8.7 per cent, producer price pressures were building up. Annual factory-gate inflation leapt to 8 per cent year on year from 6 per cent in February on the back of rising global commodity prices.

'The further uptick in intermediate goods inflation on the PPI [producer price index] reflects continuous upward cost pressure on a range of commodities, energy resources and raw materials. In this regard, faster yuan appreciation would be an effective tool for containing domestic and import prices of many essential commodities,' said JP Morgan chief economist Frank Gong.

Premier Wen Jiabao last week reminded officials during a State Council meeting of the economic uncertainties engulfing the mainland, urging them to brace for a global slowdown and volatile financial markets, surging global commodity prices, and a domestic battle to achieve balanced and sustainable economic development.

Mr Wen said the biggest domestic economic issues were rising prices, obstacles hindering agricultural production and rural income as growth in fixed-asset investment threatened to rebound, and the obstacles to conserving energy.

Mainland consumer prices have risen the fastest in a decade without signs of a letup. Economists like Deutsche Bank's Greater China chief economist Jun Ma have warned that inflation may rise to about 8.9 per cent this month, with the outlook for both May and June uncertain. He attributed the expected rise to an increase in the agricultural price index since the end of last month and approved price increases for processed food items.

'Pressures from raw materials costs and wage inflation are intensifying,' he said in a research report. 'Wage inflation has probably accelerated as well, due to the implementation of the Labour Law in January this year and inflation-led demand for wage hikes. Domestic grain prices are also under upward pressure because of rising fertilizer costs, declining farmer interest in grain production, and a surge in overseas grain prices.'

China International Capital Corp chief economist Ha Jiming forecast that inflation would begin to ease to below 6 per cent in the second half of the year as high prices in the blizzards' aftermath would have played out in the first half. He also said the United States Federal Reserve's precautionary rate cuts would taper off, paving the way for a stronger US dollar and an easing in global prices. As a result, China would import less inflationary pressure, Mr Ha said.

Beijing's counter-inflationary measures have come on two fronts. In January, the central government capped prices on a range of products including grain, meat, milk, edible oil, eggs and liquefied petroleum gas. Under the price controls, 12 major food and beverage groups including Tingyi (Cayman Islands) Holdings, China Foods, Inner Mongolia Yili Industrial Group, China Mengniu Dairy and Uni-President China needed approval to raise selling prices.

Up to last month, the National Development and Reform Commission had only approved price increases requested by Shanghai's Bright Dairy and Food, the country's third-largest dairy producer, and its smaller peer Sanlu Group, as well as Singapore-listed palm oil refiner Wilmar International.

The controls had taken a toll on the share prices of some companies until the recent price increase approvals began to lift investor sentiment.

The share price of Mengniu, the mainland's biggest liquid milk producer, had fallen almost 25 per cent since Beijing's announcement of the price caps, until its smaller rivals Bright Dairy and Sanlu Group obtained approval last month to increase their selling prices.

Mengniu's margin fell to 22.5 per cent last year from 22.9 per cent in 2006. Since October, the price of raw milk has risen 40 per cent, reducing the firm's margin to 20.82 per cent in the second half from 24.46 per cent in the first half.

Mengniu raised its product prices by 15 per cent last December and has yet to apply for further increases. Chief financial officer Yao Tongshan was ambiguous about whether the company would seek to raise its prices again.

China Foods, the edible oils, wine and beverage unit of China National Cereals, Oils & Foodstuffs Import & Export Corp (Cofco), has also suffered from the surging raw material prices.

The price of soya bean bulk oil - its raw material - has risen almost 50 per cent year on year, but the firm cannot pass on the full cost to end-users.

Citing the social responsibility of a state-owned company, management has alluded to the difficulty in raising its selling prices. The company's share price has slumped 22.18 per cent since the NDRC's January caps.

On the monetary front, the People's Bank of China not only raised banks' lending rates six times since last year; it also increased reserve requirement ratios, with the latest increase announced last week to take effect on Friday.

But analysts expect the reserve ratio to be raised by another percentage point or two this year.

As economists at home and elsewhere expect tighter monetary policy to persist on the mainland, mainland consumers say they will also tighten their belts as much as possible, although basic necessities are nevertheless essentials.

At Bonjour and Wal-Mart in Beijing, sales attendants say sales of dairy products are little changed.

'Over the past two weeks, the prices of major dairy products increased 20 fen a pack on the whole, and it seems they will continue to rise,' said a saleswoman at Bonjour.

'Prices for yogurt climbed quite quickly, however. We put new price tags on every three or five days.'