There's a good side to price increases
By Qi Jingmei (China Daily)
Updated: 2004-04-22 09:05

One of the most significant characteristics of the Chinese economy in 2003 was rapidly rising prices.

The public is concerned whether those price hikes will translate into a new round of inflation in 2004.

To judge the price levels in 2004, it is necessary to know the exact factors propelling the price hikes in late 2003 and examine the price trend for each category of commodity.

Agricultural produce is the commodity that led the 2003 increases. Grains, vegetables and edible oil witnessed their most dramatic price hikes in recent years, causing a major increase in consumer goods prices.

Food price has a remarkable influence in the consumer goods price index. Therefore, when agricultural produce sees a rising price, the food price and the consumer goods price index rise in turn.

In 2004, grain prices will maintain their momentum and continue to rise.

On the one hand, agricultural output needs two or three years to peak from previous lows and 2004 should be a period of such recovery. On the other hand, the domestic reserve of grain is also limited. Both these factors decrease the grain supply, which in turn prompts a rise in prices.

The second category of commodity is production materials. Given the economic boom in 2004, the price of production materials is likely to increase, but there are also many factors that could inhibit that trend.

The price of production materials is estimated to grow by 4.8 per cent year-on-year, 3.3 percentage points less than the 2003 annual growth.

That growth is supported by the fast growing industrial production and the international price of energy and raw materials.

But key industries like iron and steel production saw a boom in output in 2003, which will offer fresh supply into the market and ease the upward pressure of prices.

The third category of commodity is non-tradables such as electricity and transportation. It will be the major engine powering up prices.

One major challenge for China's economy in 2003 was the shortage of electricity and increased demand for transportation. However, electricity generation and transportation facilities could not be constructed very quickly and they can hardly be traded on the international market.

 The National Development and Reform Commission (NDRC), the country's economic watchdog, ruled in late 2003 the price of coal used in thermal power plant would increase.

This step, among others, will definitely trigger other price hikes in commodities that fall within this category.

The fourth category of commodity is services - and the government is taking measures to control their prices.

The NDRC issued a notice that local governments should not raise the prices of public services or living necessities in the first three months of 2004.

The fifth category is industrial products and consumer goods. Both had a negative price rise in 2003, and will only see a 1 per cent increase at best in 2004.

Summing up all these factors and their influences to the overall price, we should conclude that prices will continue to rise in 2004.

The consumer price is estimated to be 3.2 per cent up as a whole. The grain price will rise by 5 per cent and production materials will grow by 4.8 per cent.

Such price growth will not trigger all-round price hikes because this is not a core inflation.

The "core inflation rate" is a widely accepted index for measuring inflation. It is an inflation rate extrapolated from the consumer price index minus food and energy prices.

Food prices fluctuate frequently and easily according to supply and demand, and energy price fluctuation is out of the control of the monetary authorities. Both prices tend to have a balance between ups and downs on the long run.

Therefore, a price index deducting these two categories could better evaluate the overall picture of economic operation.

China's current situation is that the consumer price is primarily driven by price hikes in food and energy. Since the core inflation rate does not fluctuate significantly, there will be no extensive price increases.

Some analysts quote figures from the past to predict price increases when the economy begins vibrant growth. The fact is that economic growth and price fluctuation no longer match concisely after 1996.

The economy grew by 7 to 8 per cent on average between 1996 and 2002, but the price of production materials saw an annual growth ranging from 5.1 per cent to negative 4.2 per cent, while the consumer price registered annual growth rates between 8.3 per cent and negative 1.4 per cent during the same period.

The figures suggest that the economy is still shadowed by over-supply. As long as output grows faster than demand, the core inflation rate will not rise along with the economic progress. The chance for further price hikes in the second half of 2004 is slim.

A mild price rise will assist, rather than impede, the economy.

The price increase in agricultural produce poses no substantial impact to the life of urban dwellers, but farmers dependent on grains will see improved revenue for their produce. Therefore, it has remarkable effects in boosting farmers' income and stimulating farmers' consumption.

Also, higher prices will boost the confidence of manufacturers and investors in the economy and activate production.

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