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According to a recent survey conducted by the People's Bank of China, 24.4 percent of urban Chinese residents feel that prices of commodities are exorbitant, a 2.3 percent increase from the previous quarter. Meanwhile, the satisfaction index dropped to minus 12.1 percent, down 3 percentage points.

However, the National Bureau of Statistics (NBS) announced in August that the growth of consumer price index (CPI), a major inflationary barometer, stood at 1.3 percent, 1 percent decrease year-on-year.

From 2000 to 2005, China's CPI grew 1.2 percent annually, comparatively low next to the average 9.3 percent of annual GDP growth.

Why do many Chinese consumers believe prices have risen too much when the CPI has grown slowly?

The latest Outlook Weekly published an article by Xu Lianzhong from the Price Supervision Center of the National Development and Reform Commission who analyzed the reason behind the differences between CPI growth and residents' practical feels on price hikes.

Faster rise of commodity prices

In recent years, the rise of commodity prices has been much higher than that of the CPI. For example, the CPI grew 3.9 percent in 2004 while the average growth of food and fuel prices stood at 9.9 percent and 12.4 percent respectively.

In 2005, CPI only grew 1.8 percent, 2.1 percent drop than 2004. However, commodity prices remain at a high level. Furthermore, service prices increased 3.3 percent while residential service prices including water, electricity and gas fees increased 5.4 percent, 3.6 percent higher than the CPI.

In the first half of 2006, CPI growth continued to slow. Despite this, price hikes on fruit, vegetables, fuel and residential services stood respectively 30.9 percent, 15.9 percent, 13 percent and 3.4 percent higher than CPI.

These price hikes put pressure on residents' expenditures, especially those living on low and medium incomes.

Improper CPI calculation system

The current CPI calculation system accounts for sectors such as food, clothing, household facilities and services, medical services, transportation and telecommunications, education and entertainment as well as housing. Most of its statistical standards are woefully outdated, having been set 20 years ago. Though the values of certain sectors have been readjusted, mirroring changes in Chinese economy and society, they are still far away from accurately reflecting daily consumption expenditures, particularly after the reforms undergone by the medical, education and housing sector throughout the 1990s.

The monthly report issued by the NBS shows that the housing expenditure for Chinese residents in 2005 stood at 808 yuan (US$101), 10.2 percent of the average per capita expenditure. Education and entertainment expenditure was 1097.5 yuan (US$138), 13.8 percent of the average per capita while medical services amounted to 600.9 yuan (US$75.6), 7.6 percent of average per capita.

However, practical expenditure proportions on the three sectors are all significantly higher than the above percentages. They are the most expensive as well as the fastest growing sectors in public opinion. Ministry of Health statistics show that the annual national total volume of medical service fees in the 1980s amounted to 14.3 billion yuan (US$1.8 billion). This figure had increased to 662.3 billion yuan (US$83.3 billion) in 2003, having multiplied over 40 times in 20 years. Furthermore, the proportion of personal payments has increased from 21.2 percent to 55.5 percent.

Slow growth of income

Another important reason for the contrast between CPI growth and public opinion is the torpor in income increase.

From 1997 to 2005, personal income increase had consistently lagged behind GDP growth in China. Disposable income for urban residents rose by 9 percent annually, while farmers' net income rose by 6 percent, both lower than the 9.2 percent registered in annual GDP growth.

However, from 1991 to 1996, China's GDP growth kept steady at 12 percent annually while the increase of disposable income for urban residents and net income for farmers stood at 23.3 percent and 22.1 percent annually, a far more rapid growth.
 
This torpor has weakened residents' manageability of price increases, making them more sensitive to price fluctuations.

Widening income gap

The widening income gap across the social spectrum worsens the situation. According to a 2005 survey that sampled more than 10,000 workers in 1,000 enterprises nationwide by the All-China Federation of Trade Unions, from 2002 to 2004, 81.8 percent of workers were paid below the local average level, a 28 percent increase of the previous period (1998-2001). This worrying figure is compounded when seen that of these underpaid workers, 34.2 percent were paid half the local average with 12.7 percent receiving salary below the local minimum level.

In contrast, employers' salaries are much higher than those of employees. A survey done by the State-owned Assets Supervision and Administration Commission of the State Council showed that employers earned 12 times more than employees in 2002, which rose to 13.6 times in 2003.

According to a research undertaken by the Development Research Center of the State Council, among 1,883 enterprises in 2004, 61.2 percent of general managers benefited from an income level three to 15 times that of their workers, and 14 percent, 7.4 percent and 6.4 percent of employers earned 15-25 times, 25-50 times and staggeringly over 50 times more than their employees respectively.

The income gap between urban and rural areas increased to 3.22:1 in 2005 from 2.2:1 in 1990.

From a vocational viewpoint, in 2004, the highest-paid vocation was the securities sector that was 7.52 times higher than the income of the forestry sector. The average per capita salaries in industries like power, telecommunication, finance, insurance and tobacco were twice or three times of those in other trades. Adding bonus or subsidies, the practical income gap may rise to five to 10 times.

In 2004, 10 percent of rich families owned 45 percent of property in urban families while 10 percent of poor families only had 1.4 percent of the total properties. In the same period, urban residents' financial capital gravitated to high-income families.

China's Gini Coefficient, increased from 0.282 in 1991 to 0.47 in 2004, also shows the imbalance inherent to income distribution across the country.

Public burden increase

The reform on social welfare and security system as well as education and housing system partly transferred responsibilities, traditionally the task of social institutions and enterprises, to individual households. This, added to the slowdown of income increases and the deepening income gap, places great pressure on common residents.

Statistics show that annual per capita tuition for higher education increased 25 times from 200 yuan (US$25) before 1985 to 5,000 yuan (US$629) in 2005.

Tacking on accommodation and other fees, each student needs more than 40,000 yuan (US$5,033) for a four-year college study. However, the 2005 average annual income for a farmer was only 2,936 yuan (US$369), meaning a university education for his child would cost him 13 years' salary.

Thus, differences between practical truths and CPI growth reflect not only the improper weight of sectors inherent to the CPI calculating structure, but also the problems caused by consuming expenditure updates and structural non-coordination in economic development. These should be further improved to better reflect daily consumption expenditures and the impact of price changes on different consumer groups.

(Outlook Weekly translated by Li Shen for China.org.cn, September 14, 2006)