From the China Daily newspaper
Rising level of wages adds fuel to inflation
By Lillian Liu (HK Edition)
Updated: 2008-07-18 07:20
Economists warn that a second wave of inflation in China is on the horizon, and it's not related to food costs. AFP
As food-driven inflation peaks, China faces a second wave of price hikes built on soaring wages and commodity prices, economists said yesterday.
And the non-food costs are expected to force many manufacturers to close down, and put additional strain on exporters.
But the consumer price index is still under control, and strong domestic demand is expected to offset the decline in exports.
Chinese consumer prices began to rise sharply in mid-2007 due to shortages of pork and grain; they were made worse by the severe snowstorms earlier this year. The food inflation is about to reach a peak, but wage growth is "worrying", according to Credit Suisse.
"Look at the listing companies' result reports - both of A-shares and H-shares - their wage costs jumped dramatically. McDonald's in China has lifted its wages by 20 percent," said Tao Dong, Credit Suisse's chief regional economist for Asia, excluding Japan.
"When McDonald's lifts wages, you know something is wrong," he told reporters yesterday.
The average first-quarter wages in China increased by 19 percent, year-on-year, according to the National Statistics Bureau (NSB).
Jing Ulrich, chairwoman of China equities for JPMorgan Securities, said that "although headline inflation may have peaked for the time being", higher prices in other non-food categories also fuel inflation.
"In the current environment, China's mid-stream processors, such as oil refiners and power generators, remain vulnerable to higher input costs and price controls on their output," she said.
The country's consumer price index fell from 8.5 percent in April, to 7.7 percent in May and to 7.1 percent in June.
The decline has been attributed to government efforts to cool inflation by paying subsidies to increase food supplies and imposing price controls on food, fuel and other basic goods.
The NSB didn't give June figures for food prices, but it said they rose 20.4 percent in the first half, year-on-year. JPMorgan estimated June's food-price rise to be 17.5 percent, compared with 19.9 percent in May.
Just across the border
Taking into account the rising costs of labor and materials, the yuan's appreciation, and austere environmental policies, Credit Suisse predicts about one-third of Guangdong-based manufacturers, mostly exporters, will close down within the next three years.
And rising costs in this year alone, according to Danny Lau, chairman of the Hong Kong Small and Medium Enterprises Association, may force Hong Kong companies to close or relocate 20,000 of their 70,000 factories in Guangdong.
China's golden age of exporting is coming to an end, Tao said, but for the time being, no other country in the world is able to replace China as a top global manufacturer.
Trade data released last week shows a sharper-than-expected drop in export growth, from 28.1 percent in May to 17.7 percent in June. In the first half of this year, export growth slowed to 22 percent, against 27.6 percent in the first half of 2007.
But in the first six months of this year, imports rose 30.6 percent. That's compared with an 18.3 percent increase in the first half of 2007.
JPMorgan said the accelerating import growth can be partly attributed to the rising cost of commodities, particularly in crude oil and iron ore.
For some time, Chinese authorities have been aiming to lessen the country's dependence on trade as a growth engine, instead targeting consumption as the most sustainable driver of economic expansion, Ulrich said.
And despite the high inflation, downturns in the stock and property markets, and bad weather and natural disasters, consumer activity has remained surprisingly buoyant, she said.
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