Unpleasant awakening

6 August 2008 By Martin Hutchinson

Inflation in the Middle Kingdom has been quiescent. That s because food prices are controlled and fuel is subsidised. After the Olympics, reality is likely to return, meaning lower subsidies, higher prices and rising interest rates. That could make for a postOlympic headache.

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China's retail price index increased by 7.1% in the year to June, the fourth monthly drop since annual inflation peaked at 8.7% in February. China's wholesale price inflation for the year to June was 8.8%. Food prices rose 20.4% in the first half of 2008 over the yearearlier period.

The People's Bank of China's one year lending rate is currently 7.47%; its 3month deposit rate is currently 3.33%. The PBC has raised the bank reserve requirement ratio from 14.5% to 17.5% in 2008, but has not raised interest rates since December 2007.

China raised petrol prices 17% in June, and the retail price in Beijing is currently about $2.85 per US gallon. Fuel subsidies are estimated to cost China $40bn in 2008, up from $22bn in 2007. China also banned more than 1m vehicles from the streets of Beijing for three months to reduce pollution.

China imposed price controls on rice and wheat in January 2008. It is subsidising domestic farmers who lose from such controls.

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