China Inflation Heat As Us Eats Into Trade

The Age

Tuesday March 11, 2008

John Garnaut

CHINA'S inflationary pressures are rapidly building just as the US-led economic downturn starts to corrode China's trade surplus, new figures show.

Upstream producer prices rose 6.6% in the year to January, while export growth slowed to 6.5%, its lowest rate in six years. Slowing exports slashed China's trade surplus by two-thirds.

Economists are concerned that Chinese policymakers will not stop surging meat and grain prices from pushing up prices everywhere, which would ultimately trigger an economic downturn.

Paul Cavey, Macquarie Bank's China economist, said a recent jump in Chinese wholesale agricultural prices indicated that inflation could hit double figures for the year to February. The figures will be released today.

"It's going to be somewhere between 8% and 10%," he said. "There will be a policy reaction, but the big risk is they lack the policy tools to prevent food price inflation from becoming general inflation."

The market consensus is for inflation to rise to 7.9%, up from 7.1% in January, according to a Bloomberg survey. -- JOHN GARNAUT

© 2008 The Age

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