Rationing by Another Name

12 September 2007



China’s Inflation Hits New 10-Year High

The People’s Republic of China is a communist dictatorship that has learned that the market is better at rationing goods than a commissar is. Yet, that doesn’t mean it’s trouble-free. Inflation in the PRC has hit 6.5% in the year to August according to the National Bureau of Statistics. This is its second 10-year high in two months, and the central bank has raised interest rates four times this year to little avail.

Non-food prices rose just 0.9% in the year to August, but meat prices have risen 49% over the past year. The culprit here is pork, not the Washington, DC-type of spending, but actual swine flesh. The Chinese are the world’s biggest consumers of pork, and its pig population has declined 10% over the past year due to major outbreaks of blue-ear disease, also known as porcine reproductive and respiratory syndrome [PRRS]. The government, because it is a communist dictatorship, was able to act quickly and ruthlessly in halting the spread of the disease. Imports of pigs and meat have risen, and so have prices.

This is a classic case of inflation caused by rising wages. The urban Chinese are richer than they were even a few years ago. When people get more money in their pockets, the first thing they do is buy better food. A bowl of rice is good, a bowl of rice with pork is better. So demand is rising at the same time that the supply drops. Too much money chasing too few goods is inflation. When prices rise, more of the good in question gets produced (imports and new pig production) but it takes time.

Wealth in China, however, isn’t very evenly distributed despite communism. Urban Chinese along the Pacific shore have more money than rural Chinese in the western interior. The government, rightly, fears that price rises, and especially if it spreads beyond meat prices, could lead to civil unrest, especially in the west.

The central bank’s rate hikes will work only if there are severe enough to slow down economic activity. The undervalued currency is partly to blame because as interest rates rise, the currency needs to strengthen against other currencies. Chinese policy prevents that, and in doing so, the policy makes it harder to keep the price of bacon down.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.


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