Handouts are not the answer to inflation
Updated: 2008-02-28 07:19
A recent report announced that Xing Pu, a member of the Shanghai municipal committee of the Chinese People's Political Consultative Conference, said the government should give 1,000 yuan ($137) to each Chinese citizen as a special subsidy to cushion them from the pressure of inflation.
A specialist in economics, Xing said the idea was to share the fruits of the country's economic progress among all people fairly and equally. He said people's actual purchasing power had been infringed upon by the continuous rises in the prices of commodities, even as the country has seen remarkable improvement in its economic power.
Xing's suggestion is out of box, indeed. But the proposed universal subsidy may not serve the purpose Xing intended. If everyone got an extra 1,000 yuan, it would have the same effect as the central bank putting more cash into circulation.
Thus, commodity prices would be driven up, inflation would worsen and common people would feel even more pressure from the price rises. They would not be enjoying real wealth.
Despite the questionable feasibility of his suggestion, Xing has singled out an issue that is calling for urgent attention - actual incomes are shrinking.
The figures from the National Bureau of Statistics said the GDP grew by 11.4 percent in 2007, and government income reached 5 trillion yuan, representing a 31 percent rise over the previous year.
During the period, the per capita disposable income of urban residents increased by 17.2 percent, and the average income of the rural dwellers was up by 15.4 percent.
The gap between the growth rates of State and individual income is notable.
Driven by the country's high-speed economic development, the consumer price index (CPI) has also been on a steep rise. The CPI grew by 4.8 percent last year. And in January 2008, the CPI was 7.1 percent higher than it was during the same time last year, which was a record for year-on-year growth of the past 11 years.
To make things worse, the snowstorm that hit the central and southern regions of China during the winter hurt agricultural production in those areas, raising people's expectations of further inflation, especially for food.
The climbing prices of consumer goods have erased the gains from rising incomes.
Our CPI calculations included the price changes of commodities in eight categories. These items are all everyday necessities, such as food, tobacco and wine, clothing, transportation, telecommunications, housing rent, entertainment, education and medical care (Prices for purchasing housing is not counted with the CPI).
But the weights of these commodities in deciding the CPI number differ drastically with those in the actual spending structure of consumers.
Housing and related costs are now the most significant item in most people's spending, but they only account for 13.2 percent in the CPI calculation. It is easy to see that the current CPI calculation scheme does not mirror actual consumption.
As a matter of fact, in the CPI calculation of the United States, housing and related costs account for 42 percent, while the average level in most countries is more than 30 percent.
The property price has been on an upward ride in recent years, though it is barely reflected in the CPI growth. But people are feeling the pressure of property prices every day and have to set aside a bigger portion of their incomes, either to save for future houses or as down payments for their mortgage loans.
People's living standards might be further compromised if they expect food prices, especially the price of meat and poultry products, to climb even higher. Thus, they may be alarmed by any news of possible price rises.
A recent media report gave specific figures reflecting the increasing pressure felt by common people.
A family in Wuhu, a middle-sized city in Anhui province, had an annul income of 50,000 yuan in 2002. The price of pork that year was 14 yuan per kilogram, and the average price for an apartment in the city was 2,000 yuan per square meter.
In 2007, the family's income had increased marginally while pork was going for 30 yuan a kilogram, and the average property price was 5,000 yuan per square meter.
The family told the reporter that they felt their living standard had eroded significantly.
The current round of price rises is a structural one, with the price rises for food and property as the two biggest engines. But spending on those two items are inflexible costs that cannot be reduced without sacrificing one's quality of life. This is why people are feeling the pressure from all fronts.
Therefore, the key to making sure price rises do not infringe upon the quality of people's lives should be the price-control measures that precisely target against the two engines.
As measures such as the firm-handed price controls for the property market and subsidies to encourage farmers to boost agricultural output take hold, people should notice the pressure from rising prices easing and the decline in actual purchasing power slowing.
The author is an anchorman with China Business Network, a TV network based in Shanghai
(China Daily 02/28/2008 page8)
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