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A Chinese vendor waits for customers at a food market in Hefei, east China's Anhui province. (STR)
A Chinese vendor waits for customers at a food market in Hefei, east China's Anhui province. (STR)

China feeling the squeeze from higher prices Add to ...

China's inflation rate is running at its highest level in almost three years, pushing the government to redouble efforts to contain rising prices while facing spreading riots among disgruntled factory workers in the country's manufacturing hub.

May's consumer price index reached 5.5 per cent, its highest level since August, 2008, and well above a national target of 4 per cent this year, despite persistent efforts by the People's Bank of China to contain inflation.

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Within hours of the data's release Tuesday, the central bank announced another hike in banks' reserve requirement ratios, to 21.5 per cent - the sixth such hike this year. Analysts also widely expect an increase in interest rates, the fifth since October, before the end of the month.

China's central government is facing an increasingly challenging balancing act as it aims to cool a surging economy and rising prices, while ensuring workers earn enough to afford the soaring cost of living. Worries about a slowing of China's high-growth, low-cost economy have helped roil global financial markets in recent weeks.

Tensions are rising in Guangdong, the heart of China's crucial export industry, where two rounds of street riots broke out over the past week, triggered by a growing sense of injustice over low wages, increasing prices and migrant workers' lack of rights in their adopted towns.

In Chaozhou, thousands of people - mainly migrant workers - took to the streets, smashing cars and attacking government buildings last week after a migrant worker tried to claim unpaid wages from his bosses at a ceramics factory and was knifed for his efforts. And several thousand riot police remained in the streets of Zengcheng on Tuesday after three consecutive nights of mob violence, stemming from a crackdown on street vendors in which a pregnant vendor was shoved around by low-level security forces.

"These do escalate very quickly into quite violent public displays. The underlying issues - inflation is definitely part of it. Despite increases in minimum wage, workers at the lowest end of the pay scale are still struggling to get by," said Geoffrey Crothall, a spokesman for the Hong Kong-based China Labour Bulletin, a non-government organization that monitors working conditions in China, particularly among the estimated 150 million migrant workers who are essential to China's export industries.

China's central bank is expected to continue its string of interest rate increases.

"We still expect one more interest rate hike which is very important to manage people's inflation expectations, because inflation will probably go a little bit higher in June," said Sun Junwei, China economist for HSBC, predicting inflation will hit 6 per cent before beginning a slow descent.

The rising price of food, which makes up about 30 per cent of the consumer price index, is largely responsible for driving inflation. Food prices climbed 11.7 per cent year-over-year in May, up from 11.5 per cent the previous month, after severe drought in the country's south was followed in some places by flooding. But clothing and household items have also seen price increases and analysts have suggested the government's target of 4 per cent inflation this year may be difficult to achieve.

"This highlights that Chinese households are feeling the squeeze from higher prices for basic necessities, and will likely prompt further public pressure on the government to tackle this problem," wrote analyst Brian Jackson, with RBC in Hong Kong. "We expect that headline measures of inflation will fall later in the year as base effects turn more favourable and policy tightening gains traction, but more increases seem likely in the next few months with risks also growing that price pressures will fail to ease as quickly as Beijing would like."

Other numbers released yesterday were largely in line with expectations; industrial production and retail sales growth were both down slightly, at 13.35 per cent and 16.9 per cent respectively.

Fixed-asset investment was up, to 25.8 per cent, in what analysts said reflected more spending in minerals and metals sectors.

China is also under pressure to allow its currency - known inside China as the renminbi and more generally as the yuan - to appreciate faster against the U.S. dollar. Last week the International Monetary Fund again pressed Chinese authorities on the issue, as well as calling for more use of interest rates instead of administrative limits on loan growth to fight inflation. "A stronger renminbi will be one ingredient of a comprehensive package of reforms," IMF acting chief John Lipsky said.

Still, analysts yesterday said their GDP growth projections for the year remain between 9 and 9.5 per cent, the much hoped for "soft landing" of a more sustainable level of growth that the People's Bank of China has been trying to achieve.

"We are not worried about a hard landing or a sharp slowdown," said HSBC's Ms. Sun, whose prediction for growth remains at 9 per cent.



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