How high can pork fly? The latest price hike has caught the
attention of officials as well as the public.
Premier Wen Jiabao stressed after visiting several pig farms
around the country that measures must be taken to protect the
interests of consumers as well as pig farmers.
An inspection group sent by the State Council also said that
subsidies should be offered to low-income groups in cities and to
college students.
Several factors are pushing up pork prices.
Edible oil and grain saw price rises starting early this year,
which naturally led to rising prices in pig feed.
Corn, one of the major pig feeds, is now being used in large
amounts to produce ethanol gasoline. As a result, pig feed is in
relatively short supply and the price is high.
According to statistics released by the National Bureau of
Statistics, the average production cost of livestock products
climbed 11 percent in the first three months of the year.
Meanwhile, the outbreak of blue ear disease, also known as
Porcine Reproductive and Respiratory Syndrome (PRRS), causing
numerous pig deaths in several provinces in South China, was also a
cause of a supply shortage.
The supply shortage is also a result of farmers' cutting back
production last year because of low prices. The market was sluggish
in the first half of 2006 with a record low price for pork in May
2006. Many pig farmers lost money and quit the business.
As pork prices gradually recovered later last year, farmers
raised more pigs. But pigs need about one year to be ready to
market. So pork prices kept rising.
Supply shortages aside, the demand for pork is driven by the
booming income of the average urban family. This income rise,
starting in late 2006, also accounts for the increased demand for
pork.
Research by Goldman Sachs, the leading international investment
bank, released on May 28 indicates that the continuous price
increase in pork in recent months would probably push the rise in
the Consumer Price Index (CPI) above 4 percent. The report also
said that it is necessary for the People's Bank of China, the
central bank, to raise the interest rate to check potential
inflation.
The CPI rose by 3.3 percent in March and 3 percent in April,
reaching the 3 percent inflation "alarm level" set by the central
bank.
The pork price increase could soon lead to a price increase in
other foodstuffs, the report said. As the meat price accounts for
about 8 percent of the CPI, it could easily bring CPI growth over 4
percent if other food prices rise in coming months.
The report's predictions may be accurate. However, a CPI growth
of 4 percent or even 6 percent is unlikely to ruin China's economic
prosperity or people's daily life. This conclusion is supported by
the predicted CPI rise being less than the predicted increase in
personal disposable income during the same period.
Moreover, the renminbi has been appreciating recently on the
foreign exchange market. The authorities have enough leverage to
deal with even greater inflation with the huge foreign exchange
reserve and enormous trade surplus, not to mention possible
inflation of 4 to 6 percent.
Some observers believe the inflation is caused by overheated
investments, especially the stock market frenzy. The market boom
stimulates consumption.
This opinion does not hold water. One of the basic necessities
of life, pork consumption does not alter dramatically with income
growth.
When people have more money, they do tend to buy more pork. But
their increased pork consumption stops at a certain point even if
their income keeps rising. It takes a long time for the revenue
from the capital market to translate into increased consumption in
life's necessities.
Judging from a broad look at the Chinese economy, inflationary
pressure is not overly strong. CPI growth of 3 percent, mild
inflation, will not hurt the economic soundness or the standard of
living unless it is coupled with a dramatic growth in the Producer
Price Index (PPI).
Actually, a certain amount of inflation will help stabilize
economic prosperity and growth.
It is far from reasonable to expect food, services and
transportation to maintain their current prices or even decrease
while people enjoy an average annual income growth of 10
percent.
When the economy achieves two-digit growth every year, consumer
goods and investment goods should also rise in price. Thus,
investors can expect a steady return from their investments and
producers get reasonable profits.
Admittedly, the risk of excessive liquidity currently exists.
Yet the economy remains one of high growth and low inflation, which
is not going to be reversed in the short term.
The price rise in investment tools is unlikely to reach consumer
goods. And disastrous inflation will not trouble China at this
moment.
Of course, social groups at different income levels have
different capabilities of coping with inflation. A food price hike
obviously puts more pressure on low-income families.
The central government will help those suffering from the price
rise. Special subsidies will be granted to help them through the
temporary price hikes in consumer goods.
The author is a professor with the School of Economics,
Peking University
(China Daily June 4, 2007)