DRC Task Force

Economic perspectives No. 8, 2008

Since 2008, the economic operation has been advancing in the direction that was anticipated when the guideline of "Two Prevents" ( prevent fast economic growth from becoming overheated growth and keep the structural price increase from turning into significant inflation) was put forward in the beginning of the year. As it turns out, the rise of consumer prices is slowing down and the risk of the occurrence of an overheated economic growth has dwindled considerably. At the same time, there have appeared more and much influential precarious and unstable factors than expected in the economic operation, thus giving rise to some new circumstances and new issues that merit attention. The price rise still remains at a higher level, the factors driving up prices are changing and the medium- and long-term pressures from inflation can not be neglected; moreover, the economic growth is confronted with various pressures such as the decrease of external demand, the unstable Chinese domestic demand and the increase of difficulties, etc.. In the later half of the year, the macroeconomic policy should be aimed at finding a new balance point between stabilizing prices and maintaining a stable and fast economic development in order to "alleviate the inflation, stabilize the growth and facilitate the economic reforming".

I. Price Rise Still Remains at a Higher Level and the Dominant Factors for the Rise Are Changing

Recently, the dominant factors driving up consumer prices are changing and the impact produced by the rise in energy and resource prices on the rise of consumer prices has intensified. Within the year, the rise of consumer prices is likely to slow down, but medium- and long-term pressures from inflation will keep considerable.

1. The rise of consumer prices is slowing down, and the dominant factors for the rise are switching from meat and egg products to foodstuff and industrial consumer goods

The rise of consumer prices since May 2007 has been mainly fueled by the rise of food prices, and the rise of food prices has contributed an average 83% to the rise of consumer prices. As supply of meat and eggs increases, the prices of those products have fallen accordingly and the rise of food prices and consumer prices dropped from 23.3% and 8.7% in February 2008 to 19.9% and 7.7% in May respectively. On the other hand, except for meat and eggs, prices of other consumer goods and services have increased remarkably. The dominant factors for the rise of consumer prices are changing.

Firstly, affected by the price ratio effect resulting from the rise in prices of meat and eggs, prices of aquatic produce have increased, up 18.3% in May as compared to the same period of last year, partly balancing the restraint from the decline of meat and egg prices against the rise of consumer prices.

Secondly, affected by the drastic rise of foodstuff prices on world market, foodstuff prices in China have risen continuously and rose by 8.6% in May. At present, except for soybean, China's foodstuffs are much less dependent on world market, therefore, the foodstuff price hike on world market is yet unable to conduct to China directly. However, the widening foodstuff price spread between China and the rest of the world and the demonstration effect of the high foodstuff prices on world market are likely to drive up foodstuff prices in China within a future period of time. Increase of food cost caused by the rise of foodstuff prices is likely to become a new and important factor to drive up food prices and consumer prices.

Thirdly, the drastic rise in prices of means of production caused by the rise in prices of primary commodities is conducting to industrial consumer goods and to consumer prices. As there is a fierce competition in production of industrial consumer goods, the cost increase caused by the rise in prices of means of production has been digested and absorbed in production, with only 10% or so of the increase having conducted into the prices of means of subsistence. However, the fast increase in prices of means of production since 2008 has obviously driven up the prices of part of the means of subsistence, especially prices of industrial consumer goods. In May, ex-factory prices of clothes and articles of everyday use as well as prices of household equipment and service prices went up 2.4%, 3.9% and 2.8% respectively, showing an all-time high since 1999. If in the future prices of the means of production rise significantly and remain high for an excessively long period of time, and if the processing and manufacturing industries become less and less competent for digesting and absorbing the rise in prices of upstream products, then prices of industrial consumer goods are likely to rise considerably and fuel another increase in consumer prices.

In addition, affected by the drastic rise of real estate prices and the increase in electricity and water prices over recent years, the housing service prices have risen a lot as well. The rise in prices of oil products and in electricity prices commencing in July will also become a factor to drive up the consumer prices during the later half of the year.

2. The price rise mechanism for means of production has changed and the price rise has accelerated

Since September 2007, prices of means of production have been rising continuously and the rise reached 9.2% in May 2008, being close to 10.9% in October 2004. The present rise in prices of means of production is quite different from the price rise during January 2002 and November 2004.

Firstly, the factors driving up the prices are different. During January 2002 and November 2004, it was mainly the rapid expansion of investment demand that fueled the rise in prices of means of production. Nevertheless, the present rise in prices of means of production resulted from the increase of production cost brought about by the rise in prices of such primary commodities as iron ore, coal and crude oil against the backdrop of a continuous decline in increase of investment demand. Estimation of industrial correlation shows that the rise in import prices of iron ore and crude oil drove up the prices of means of production by 2.36 percentage points in May 2008, accounting for 25.65% of the rise in prices of means of production; the rise in prices of China-made iron ore, coal and crude oil drove up the rise in prices of means of production by 3.93 percentage points, making up 42.7%, namely, of the increase of 9.2 percentage points in prices of means of production in May 2008, 6.29 percentage points or 68.42% of the increase were driven up by the rise in prices of China- or foreign-made iron ore, coal and oil, which is a typical cost-driven price rise.

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