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Policemen take away a truck driver and his wife holding their child in Shanghai April 21, 2011. Container truck drivers protested on Wednesday and Thursday in Shanghai over rising costs and surcharges, drivers and bystanders said. (STRINGER/CHINA/REUTERS)
Policemen take away a truck driver and his wife holding their child in Shanghai April 21, 2011. Container truck drivers protested on Wednesday and Thursday in Shanghai over rising costs and surcharges, drivers and bystanders said. (STRINGER/CHINA/REUTERS)

At the world's largest port, China's inflation problem boils over Add to ...

At the world's busiest container port, China's inflation problem is becoming an obstacle to global trade.

Incensed by spiking fuel costs and consumer prices, truck drivers hauling goods to and from the Port of Shanghai went on strike Wednesday, triggering a major confrontation that drew hundreds of police officers after truckers reportedly blockaded the entrance to a local logistics company.

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Even as the crackdown turned violent, the truckers vowed to continue their protest at the port, which moved almost 80,000 containers a day in 2010 and overtook Singapore to become the busiest container port on the planet. The standoff, which is already making an impact on the flow of goods in and out of Shanghai, highlights the challenge that worsening inflation poses to policy-makers in China.

Spurred by a 12-per-cent jump in food prices, China's annual inflation rate surged to 5.4 per cent in March, the highest in more than two-and-a-half years. The potential for runaway inflation is a serious concern for the Chinese government because, in the past, major consumer price increases have led to civil unrest. Inflation has become the hot-button issue among China's 1.3 billion citizens: many are struggling to make ends meet as the price of basic necessities such as food has skyrocketed following a frenzied run-up in real estate values.

At a shabby dining hall in Shanghai's Baoshan district on Friday, a group of truckers said the soaring cost of fuel, coupled with hefty transportation fees, have eroded their profits. "There is too much inflation," said one of the striking drivers, who agreed to be interviewed but declined to give his name out of fear for his safety. "We will continue to protest, thousands of us are on strike … we are not transporting anything. We have stopped everywhere."

The government has made fighting inflation a top priority this year. It has raised interest rates and boosted reserve requirements for banks as well as slapping price controls on some consumer staples.

But China has been slow to take the step that would strike most directly at its inflation rate: allowing its currency to appreciate. China kept its currency artificially low to reduce manufacturer's costs and keep the country's massive export sector competitive. This requires China to continually buy U.S. dollars and issue more yuan, a policy that expands domestic money supply and fuels inflation pressure.

Rapid growth and inflation in China and other emerging markets also pose a serious challenge to policy-makers in advanced economies. Already trembling under the burden of mounting debt, many countries in the Western world are facing tough decisions over spending cuts sooner than they expected. China's slow efforts to keep a lid on runaway growth have so far only contributed to those problems, as that nation's inflationary pressures lead to more price increases around the world.

There are also dangers if China's slowdown comes too quickly: A significant curtailing of growth threatens to drive down commodity prices and foreign investment, pushing many advanced economies back into trouble. But those broader concerns are taking a back seat to the striking truck drivers, who are growing increasingly frustrated with the rising cost of living.

Reuters, citing witnesses, reported that as many as 2,000 demonstrators were involved in the protests on Wednesday.

"There is a strong feeling that the cost of living is rising and it's cutting into people's real gains from a growing economy," said Patrick Chovanec, a professor at Tsinghua University in Beijing.

"It's of great concern if it becomes part of a trend. There are localized protests nearly every day about all kinds of issues, but this is one where the pressures are likely to grow in intensity in the days ahead, and everyone - including the Chinese government - will be watching to see how people respond and whether frustration boils over," Mr. Chovanec said..

In a possibly related move, the yuan touched a fresh high against the U.S. dollar on Friday. China's central bank set the currency, which is also known as the renminbi, at 6.5156 per U.S. dollar, up from Thursday's 6.5205.

Capital Economics in London said it now expects the yuan to rise at an annualized rate of 8 per cent against the dollar over the next six months.

Amid the consumer agitation, the Chinese government has moved quickly to quash any unauthorized public gatherings. Earlier this year, scores of uniformed and plainclothes police descended upon on the Wangfujing shopping district in Beijing after it was touted on websites as the site of a so-called "Jasmine Revolution" protest.

Soaring fuel costs and poor economic opportunities have been the major catalyst for the recent uprisings in North Africa and the Middle East.

Last year, labour unrest and calls for higher wages from workers rocked several foreign manufacturers operating in China including Japanese auto makers Honda and Toyota as well as Taiwanese electronics manufacturing giant Foxconn Electronics Inc.

Chinese authorities are already in the midst of the largest roll-back of freedoms in the past decade and have arrested a number of high-profile dissidents.

"The police beat us until there was blood," said another driver. The trucker said authorities had also blocked websites where his colleagues had posted information about the protests. Hundreds of trucks were idled as demonstrations continued on Thursday and Friday, according to reports from Reuters and Associated Press.

A much stronger than usual police presence remained in Baoshan's port area on Friday. Cab driver Lei Chenxiao said police had blocked several roads earlier in the week.

"Before the protests there were never police here," Mr. Lei said.

However, Mr. Chovanec said that allowing the value of China's currency, the yuan, to appreciate would be the most effective measure to counter inflation. A stronger currency, however, would hurt Chinese manufacturers, which remain a critical element to the world's second-largest economy.

"As long as it maintains the peg, China has to run just to stay in place on inflation. Allowing the yuan to appreciate would relieve the pressure on the People's Bank of China to keep buying dollars and issuing more RMB. This is ultimately the solution," Mr. Chovanec said.

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