Inflation concerns have no borders
Inflation was clearly on the mind of the State Council's Hong Kong and Macau Affairs Office director, Wang Guangya, during his visit to the city this week, the first since his appointment. He warned our government it faced political problems unless it dealt urgently with issues such as housing and external economic forces. It is sage advice, but nothing authorities here are unaware of. The issue is not a 'one country, two systems' matter, after all, but a national and a global one. Soaring commodity prices are pushing up the cost of consumer goods everywhere, which is leading workers to press for higher wages. Governments the world over are trying to cope with the resultant inflation, knowing that if it gets out of hand, a vicious cycle could take root. That is especially so in fast-growing developing economies, the mainland's foremost among them. The bigger the slice of people's wages going towards meeting basic necessities, the greater the central government's concerns about social unrest.
With inflation having risen in May to a near three-year high of 5.5 per cent, 1.5 percentage points higher than the ceiling set for this year by the central government, a further squeeze on bank lending has been ordered. Interest rates have already been raised four times since October and will in all likelihood be increased again in coming months. In sharp contrast, measures to limit money supply have not been taken in Hong Kong, which recorded a 4.6 per cent increase in the consumer price index in the year to April. This was perhaps on Wang's mind when he voiced his worries.
It has to be remembered that an important element of the 'one country, two systems' model is that Hong Kong's economy is significantly better developed than the mainland's. That necessitates a different approach towards handling matters like inflation. Across the border, the problem would seem to have been fuelled in large part by the massive stimulus package rolled out in 2009 to ward off the effects of the global economic downturn. An excessive supply of money and credit was created.
Hong Kong's leaders do not have such problems to deal with. Rather, their concerns are more related to the upward march of property prices and keeping housing affordable. Food prices are also directly affected by rent rises, which our CPI, as currently calculated, does not adequately reflect.
Differing approaches or not, though, inflation has to always be a matter for concern. Higher prices and wages are not necessarily bad - in the mainland's case, where pay has lagged productivity growth, together they can spur domestic spending and create a stronger economy. The focus instead has to be on preventing loose monetary conditions and an overheated economy. Wang is right - vigilance is needed, on both sides of the border.