February 5, 2008 / 1:08 AM / 10 years ago

China inflation causes economic woe

CHONGQING, China (Reuters) - China is supposed to be getting richer, but for Liu Gaohua, rising prices on everything from cabbages to houses mean life is only getting tougher.

<p>A vendor sells dried fish at a market in Qihe, Shandong province, January 30, 2008. REUTERS/Stringer</p>

“It’s hard to get by day-to-day,” said the resident of Chongqing, a western Chinese industrial city on the upper reaches of the Yangtze river.

“We eat less pork than before. Before, we would eat it every day. Now it’s just too expensive. We eat it about every third or fourth day,” he said.

Liu, who works in the railway industry and is married with a 14-year-old son, is typical of those being squeezed hardest by soaring prices -- the lower middle-class urban residents far from China’s wealthier coastal cities.

With consumer prices rising at their fastest rate in 11 years, China’s inflation is not only a sign of economic woes, it has become a political challenge for a leadership worried that any slowdown will erode its support and trigger instability.

President Hu Jintao, Premier Wen Jiabao and their team of economic policy-makers find themselves caught between the goals of their reform programme and their need to step in to moderate prices and ward off the specter of social unrest that has haunted every generation of China’s Communist rulers.

Inflation figures have been disproportionately affected by rising food costs, especially staples like pork and cooking oil, leading some economists to predict the rises would not last.

But others say Hu and Wen might be victims of the very success of their programme to build a “harmonious society.”

The term has become a catch-phrase referring to a model of more moderate growth that seeks to account for costs previously overlooked, from worker safety to environmental protection.

An emphasis on work safety means smaller coal mines are being shut down, a campaign on food and product safety has taken some of the cheaper -- and more harmful -- pesticides and fertilizers off the shelves and a crackdown on polluters is forcing factories to install better equipment.

Wages are also rising as the reservoir of surplus labor begins to be mopped up.

But all of that reflects a broader adjustment in the economy that could mean higher prices will not quickly abate.

“There’s obviously mounting costs all along the way,” said Matthew Crabbe, managing director of consumer research group Access Asia.

“The problem is how they balance the cost of creating that more harmonious society, whether it’s pollution controls or increasing the income of rural China. There’s a very fine balancing act there,” he said.

STEPPING IN

For some residents, the benefit of those policies that aim to save lives, curb environmental degradation and create a more equitable society, are being obscured by the only immediate consequence they see: the effect on their pocket-books.

Li, a 52-year-old housewife, complains that she pays about 15 yuan per half kilo of pork, compared with six yuan a year ago.

It was in a supermarket here in Chongqing that three people were killed in a November supermarket stampede as they scrambled for cut-price cooking oil.

Housing prices in the gritty port city are also soaring.

Li, who only gave her surname, said houses in Chongqing were going for around 7,000 yuan per square meter, compared to about 1,200 per square meter a few years ago.

“We have no means to get by,” she said.

Her friend, joining her in a game of cards in a chilly temple courtyard tucked away from the city’s bustle, chimed in.

“Wages are rising but the price of food is going up much faster,” said the woman, surnamed Tan. “Our demands, our wishes, are that the government controls this. They shouldn’t let prices rise too high.”

For now, they aren‘t.

The government stepped in earlier this month, announcing it would “temporarily intervene” in the market to prevent excessive price rises, harkening back to China’s planned economy days.

“Essentially, the government is saying, where possible, and especially if you are a state utility, don’t raise prices and contribute to these worries,” said Dali Yang, director of Singapore’s East Asian Institute.

In the past few weeks, the Education Ministry has also weighed in with temporary subsidies for student canteens, and Vice Premier Hui Liangyu called for stricter implementation of farming subsidies and preferential policies for rural workers.

PLAYING TO THE MASSES

The policy moves play to the image Wen has cultivated for himself as a man of the people. But the strategy, while appeasing the masses, is not without risks.

“The worry is, if you impose those price controls you may distort the price situation and let deformities increase over time,” said Dali Yang, director of Singapore’s East Asian Institute.

But without controls, the specter of social unrest looms.

Inflation is often cited as a reason the Nationalist government lost the civil war to Communists in 1948-49. Market relaxations in 1988 caused sharp price rises that were seen as contributing to discontent that culminated in the Tiananmen Square demonstrations a year later.

Both are worrying reminders of the link between prices and instability, especially as the country prepares to host the 2008 Olympics in Beijing this August.

If prices keep rising, people across the vast country may begin to vent their frustration.

“In China, 70 to 80 percent of the people are poor and live in the countryside,” said factory manager Wu Xijun, 37. “If GDP is going up but prices are too, the economic growth is meaningless to people.”

Editing by Megan Goldin

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