Global turmoil in markets poses challenge to China
BY KEIKO YOSHIOKA CORRESPONDENT
Following an increase in pork prices, the price of eggs has surged to an equivalent of 62 yen (86 cents) per 500 grams in Beijing, 20 percent higher than last year. (Keiko Yoshioka)
BEIJING--China, a powerful driver of the global economy, is not immune to the turmoil in the world's financial markets set off by a downgrade of the U.S. credit rating this month.
Investors' flight from stock markets poses a challenge to China as well, whose economy has achieved a growth rate of 9.6 percent in real terms during the first half of 2011.
At an Aug. 9 meeting of the State Council, Premier Wen Jiabao called for responsible fiscal and monetary policies to calm financial markets in a veiled reference to the United States.
He also called for hedging against risks, saying uncertainty and instability in global financial markets are deepening.
Chinese leaders agreed to spare no pains in pursuing the country's policy of achieving stable economic growth while reining in the price of goods.
But containing a surge in prices, which Wen calls the most important of issues, is proving difficult.
The country's consumer price index (CPI) increased 6.5 percent in July from a year earlier, the highest growth rate since June 2008, when it logged 7.1 percent, according to a report released the same day by the National Bureau of Statistics.
For the first seven months of this year, the CPI stood at 5.5 percent, guaranteeing that the figure will surpass the nation's annual goal of 4 percent for this year.
The biggest contributor to surging prices are foodstuffs, which soared 14.8 percent in July from the same month last year.
The price of pork jumped 56.7 percent, eggs 19.7 percent and seafood 15 percent, increases that hit the working class particularly hard.
Real estate prices remain at high levels despite the government's maneuvering to control market speculation by restricting loans and purchases.
High rents have hit hard the lives of the middle class in urban areas.
But Chinese authorities cannot afford to stem a rise in workers' wages because that could further destabilize a society that is witnessing a flurry of riots by disgruntled residents.
A rise in wages would result in driving up inflationary pressures.
Chinese authorities have tightened credit since last autumn by raising interest rates to keep inflation in check.
But they have failed to generate the intended result, and the measure culminated in the bankruptcy of many small and midsize businesses.
A downgrade of U.S. sovereign credit rating this month and resulting turmoil in the world's stock markets came at a time the Chinese government is struggling with inflation.
The development raises the possibility that China will not choose to raise interest rates, which it has done before, according to the Hong Kong arm of Nomura Securities Co.
China will likely see inflationary pressure only heighten in coming months if more money flows into the Chinese market from markets of advanced countries that have eased credit.
China was able to turn to a package of pump-priming measures in the aftermath of the collapse of Lehman Brothers in autumn 2008, because its CPI was in a downward phase.
Sun Lijian, professor of economy at Fudan University, said that China's exports--the locomotive for its economy--will likely slow.
"China will be tested whether it can switch to an economy led by domestic demand, which it aimed for," Sun said.
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