Economists say the government is downplaying the impact of rising food prices

The Chinese government said on Tuesday consumer prices rose 4.9 per cent in January, a lower-than-expected figure that has raised questions among many economists here who say the government is downplaying the impact of rising food prices to calm public fears.

According to data released by the National Bureau of Statistics (NBS), the Consumer Price Index (CPI), the main gauge of inflation, was 0.3 percentage points higher than in December but still lower than November’s 28-month-high of 5.1 per cent.

The data surprised economists against the backdrop of fast-rising food prices, which have been driven up by a four-month-long drought across much of northern China’s wheat-producing regions.

The lower-than-expected figures were attributed by economists The Hindu interviewed, to a reweighting of the basket of goods used to measure the CPI, discounting the impact of rising food prices.

“There is no question that the real inflation figures would be much higher,” said Wang Youqin, an economist at the influential China Centre for Economic Studies at Shanghai's Fudan University. “By keeping the CPI at 4.9 per cent, the government is trying to manage the public’s expectations by keeping it below the 5 per cent threshold.”

Social stability

Food price inflation has long been viewed with particular importance by the Chinese government, seen as an indicator of social stability.

According to the NBS, food prices rose 10.3 per cent year on year. Grain prices rose 15.1 per cent.

The government has struggled to combat the rising inflation unleashed by cheap credit, which has flooded the market following a loosening of monetary policy in 2008 in response to the recession. The central bank has raised interest rates three times since October, but the moves have only had a limited impact.

Unlike many other countries, China does not release detailed information on what constitutes the basket of goods used to calculate the CPI. The NBS said on Tuesday, food prices earlier accounted for one-third of the basket of goods, and that it had reduced the weighting by 2.21 percentage points. It did not, however, specify either the basket’s new contents or their respective weights.

More transparency

Mr. Wang and other economists have called on the NBS to improve transparency. “There is public distrust with the government’s figures, and the basket is not transparent,” he said. “Based on experience, whether in markets or restaurants, people will have their own expectations.”

“The NBS changes the basket from time to time, but no one knows where the data comes from,” he added. “There are no independent sources of information.”

The reformulated CPI basket was not unexpected “at a time of politically-sensitive food price gains,” according to Alistair Thornton, a China-based analyst at IHS Global Insight. He said in a statement, there was “far too much liquidity in the system,” with an estimated 1.1 trillion yuan ($166 billion) in loans in January alone.

“Need for reform”

Wary of discontent over rising food prices, Chinese officials have, in recent weeks, sought to calm public fears. Premier Wen Jiabao said earlier this month, in his Chinese New Year's message, the government needed to “resolve the problems that the people most care about” and “resolutely prevent prices from rising too fast.”

Mr. Wang said raising interest rates and tinkering with monetary policy would not address the issue in the long-term. “The government needs to do something substantial in terms of economic reform,” he said. “For one, there is a need for deregulating monopolies in the State sector, which still has most of the money. Restrictions on labour mobility also need to be relaxed, because they are driving up wages. If we don’t address these bottlenecks, the problem will not go away.”

No impact on global food prices

On Tuesday, the Chinese government also sought to address global concerns that the drought across eight wheat-producing provinces would drive up food prices, following a warning issued by the United Nations Food and Agriculture Organisation (FAO) last week.

“China is self-reliant on food,” Foreign Ministry spokesperson Ma Zhaoxu told a regular press briefing.

Continued bumper harvests for the seventh straight year and “abundant reserves” would ensure that China met its demand. A “small amount” of Chinese imports, imported under its quota, would not impact international food prices.

Mr. Ma said the government was “taking active measures” to minimise the impact of the drought, acknowledging that it was likely to have some impact on winter production.

The drought, the worst to hit China in 60 years, has affected eight major wheat-producing provinces, leaving close to 3 million people without adequate drinking water. The government last week announced a $ 1.96 billion relief effort to mitigate its impact.