Wage rises keep China inflation entrenched

Chen has boosted basic monthly pay to 1,600 yuan 250,200-300 yuan more than last year,offers bonuses and other benefits that roughly double take home wages. He still can8217;t get enough staff to cope with a solid increase in business.

A tight jobs market and rising base wages 8212; often well above officially-mandated minimums that rose an average 22 per cent in 2011 8212; are key to the risk of entrenched Chinese inflation in 2012,despite softening economic activity that saw price pressures cool towards the end of last year.

Inflation is coming down,but there are still a lot of tailwinds and structural forces behind price rises,Kevin Lai,economist at Daiwa Capital Markets in Hong Kong told Reuters.

Double-digit wage rises are not the only ones.

Government policies designed to spur domestic consumption and rebalance the economy by boosting imports are also at play. So too are long-planned reforms to a raft of administered prices that economists say are more likely and easier to be implemented as overall economic growth rates cool.

Furthermore,the legacy of China8217;s 4 trillion yuan fiscal stimulus and lending frenzy in the wake of the 2008/09 global financial crisis means there is still plenty of easy money sloshing around the world8217;s second-largest economy.

INFLATION MODERATING

Inflation has clearly been on a downward slope since hitting a three-year annual peak of 6.5 per cent in July and data on Thursday showed the rate had eased to 4.1 per cent in December,down for a fifth straight month.

But that still meant inflation had come in above 20118217;s official 4 per cent target in each of the last 12 months,delivering an average rate of 5.4 per cent for the year.

Meanwhile,an uptick in the annual rate of food inflation to 9.1 per cent in December from November8217;s 8.8 per cent 8212; the lowest since September 2010 8212; would be troubling if it signalled a rebounding trend in the cost of basic foodstuffs.

Food prices remain the biggest driver of discretionary consumer spending in an economy where average monthly salaries are just 3,000 yuan 476.

There are many reasons why China8217;s central bank chief,Zhou Xiaochuan,has warned against complacency over inflation.

We should not loosen policies to rein in excessive consumer price gains,and reasonably manage inflation expectations,Zhou told the Xinhua news agency in an interview published on Sunday.

INFLATION BOTTOM SEEN SOON

Indeed,there are few signs that China will slip towards deflation as it did in 2009,with economists widely forecasting inflation to bottom out at 3 per cent in the first half of 2012.

The economy is more resilient than three years ago and deteriorating demand for goods from the country8217;s vast factory sector have already seen the government start to pursue more policies to boost growth.

The chance for a very low inflation is very small,because China8217;s policies are flexible,said Ting Lu,China economist Bank of America/Merrill Lynch in Hong Kong.

If inflation is declining faster than projected,the government will likely seize the opportunity to carry out power tariff hikes and other price reforms,which would be difficult when inflationary pressures are high,he said in a note to clients.

Beijing has long-pledged to reform its resource pricing regime to help conserve resources and curb environmental damage as part of efforts to change its economic development model.

China8217;s top planning agency wants to raise government-set prices of power,natural gas and heating soon because inflation has eased.

The government has been reluctant to raise domestic energy prices despite considerable increases in supply costs,fearing rapid price hikes would stoke inflation and cause social unrest.

That is especially the case if one of the most important structural features in China8217;s economic landscape has changed 8212; the steady urban migration of millions of rural workers which has delivered a hitherto unrestrained supply of industrial labour.

Many economists believe China may have already crossed the so-called Lewis turning point,meaning that all excess rural labour has already been absorbed by urban areas and that structurally higher wages 8212; and inflation 8212; lay ahead.

Many provincial authorities have rushed to increase minimum wages,in line with central government plans to boost spending power and domestic consumption,despite warnings of tightening labour supply from factory bosses.

STIR-FRY SPECULATION

Meanwhile,easy money is still sloshing around the economy despite policy tightening that brought money supply growth down from a breakneck 8212; and dangerously inflationary 8212; pace close to 30 per cent in late 2009,to 13.6 per cent last year.

China8217;s M2 money supply hit a staggering 85 trillion yuan 13.46 trillion at the end of 2011,equivalent to 210 per cent of GDP in 2010 8212; one of the highest in the world.

That growth has fuelled inflation risks as China8217;s closed capital account has forced the central bank for decades to print local currency to sterilise sustained inflows of foreign capital generated by energetic exporters and assiduous inward investors.

Excess liquidity has been blamed for the so-called Chinese stir-frying or asset-price speculation in recent years in everything from real estate and redwood furniture to garlic and green beans.

Chinese officials and policy advisers also fear that Western central banks,still boosting money supply to revive growth in the wake of the financial crisis,could reignite commodity price rises and fuel imported inflation.

Zhang Zhuoyuan,an economist at the government think-tank Chinese Academy of Social Sciences,reckons that China may see annual inflation hovering above 4 per cent until 2013.

The main reason of the current inflation cycle is the excessive money issuance in the past few years,and inflationary pressures caused by that cannot be released completely in 2012,he wrote in an article in Chinese Caixin Century magazine.