Price rise accusations have no foundation
Updated: 2008-01-07 10:30
Last month, a magazine in the Republic of Korea published reports that China had become the primary source of price rises around the world. A report by the central bank of Canada also claimed that China's demand for petroleum and mineral resources would push prices up in the next few years.
These opinions are actually accusations that China is exporting inflation to other countries. This is not true and has been denied by the Chinese authorities time and time again.
Such accusations are natural as China gains an increasingly important position in global trade. And along with China's prosperous economic growth, there might be other doubts and accusations.
It is true price rises in the Chinese market has attracted wide attention domestically and abroad. The growth in the Chinese consumer price index (CPI) is not only a reference for decision-makers of China, but also a figure closely watched by economic analysts in other countries.
As the authorities have predicted, the CPI growth in 2008 is going to be around 4.0 percent. And the inflation pressure is not going to ease even after the Olympic Games in summer. Therefore, the price issue in China is likely to remain in the limelight this year.
It is, therefore, especially important to analyze the validity of the accusations to see whether or not the rising prices of Chinese commodities in the domestic market have threatened the welfare of consumers in other countries.
Before detailed discussions, it is necessary to clarify that the CPI growth in China is primarily driven by the price of food, especially pork, vegetables and other agricultural produce.
All these commodities are not major items in China's exports. To curb rising inflation and meet domestic demand, the central government imposed export tariffs on January 1 on major grain products, including corn, wheat and soybean.
The price rises of these commodities is, therefore, impossible to go beyond our borders.
Supporters of the opinion that China is exporting inflation believe China's exports are mostly low-end consumer goods and the inflation in other countries is automatically intensified when the low-priced goods see a price hike.
But this is not how an economy runs.
A destination country of China's exports will not see its inflation rate lifted by a rise in Chinese commodities unless it does not have alternative suppliers for the same commodities with a better price.
For years, Chinese exports have played a significant role in bringing down world inflation. It does so, not because it is low-priced, but because it is more economical than the output from other countries and gains more market share in time.
The lower prices against other suppliers would continue to cool world inflation even if Chinese exports are a bit more expensive than it was before.
Moreover, the price change of Chinese exports is caused by the appreciation of the renminbi against the US dollar.
The dollar has been weak for years so US imports from most countries, especially from Europe, has witnessed a continuous price rise since 2006.
After China adopted a more market-based foreign exchange rate regime from July 2005, the exchange rate of the yuan against the US dollar has gained at least 9 percent today. It gained 6.86 percent in 2007.
Chinese manufacturers with limited profit margins, like those in textile products and toys, were forced to raise their prices in US dollars.
The latest research by Lehman Brothers suggests that the average price of garments, in US dollars, exported by China rose by 4 percent in the first six months of 2007 over the same period in 2006. This rise, the report points out, is roughly the same as the growth of the renminbi against the US dollar. And, after the renminbi's appreciation is deducted, the price of Chinese exports is actually lower.
In other words, Chinese exports do not have a price hike if they are priced in renminbi. And the higher price in US dollar terms is a direct consequence of the renminbi's appreciation.
As a matter of fact other countries should realize that the real reason for the intensifying inflation pressure is because of short-sighted trade protectionism.
Trade protectionist campaigns of various countries keep low-priced Chinese commodities of reliable quality out of reach of their consumers, and raise their cost of living.
As a reliable supplier of low-priced commodities to consumers around the world, China does not deserve any blame from other countries.
The author holds a doctorate from the China Center for Economic Studies under Fudan University
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