Criticizing China for exporting inflation unjustifiable

Posted on Apr 21, 2011 in AllEconomic News
Statistics recently released by the National Bureau of Statistics show that China’s CPI was up 5 percent in the first quarter from a year earlier. This figure has drawn wide attention at home and abroad. Some Western media agencies have even criticized China for transferring inflationary pressure to the West and imposing greater economic pressure on the West.

In response, Zhu Hongren, head engineer of the Ministry of Industry and Information Technology, said during a press conference on April 20 that the fact is that the rise in international commodity prices has affected China, posing a severe challenge on the stability of China’s CPI. He said frankly that criticisms claiming China is exporting inflation to the West are simply unjustifiable.

China is a victim of imported inflation

Zhu said that the world economy is interrelated and interactive against the backdrop of economic globalization. The process of China’s economic development is also a process of fully unleashing China’s original comparative advantages, including a major advantage of owning a relatively high-quality and low-cost workforce.

Meanwhile, China lacks natural resources and energy, with a low level of per capita possessions of natural resources and energy in the world. During the process, China has fully taken the comparative advantage in owning a low-cost workforce while consuming an enormous amount of imported energy and natural resources. This development structure will unlikely undergo a major change over a rather long period.

He said that some major developed countries adopted quantitative easing monetary policies in the process of emerging from the international financial crisis, resulting in the surge in the prices of commodities, including energy, raw materials and grain. The pressure arising from this type of imported inflation has not only brought about new problems to China’s effort of maintaining stable and relatively fast industrial growth but also caused new inflationary pressure on China.

Related data shows that the import prices for some major commodities were on the rise in the first quarter of 2011, with the average price of iron ore surging by 60 percent to 157 U.S. dollars per ton and that of soybean climbing by 26 percent to 574 U.S. dollars per ton.

China eased global inflationary pressure

Zhao Zhongxiu, president of the School of International Trade and Economics under the University of International Business and Economics, believes the rise in bulk commodity prices in 2011 is an extension of 2010, and the relatively higher rise in crude oil and iron ore prices is mainly caused by factors such as the turmoil in the Middle East, the weakness of the U.S. dollar, the quantitative easing monetary policy in developed countries and the collusion of financial speculators.

Zhao pointed out that China’s implementation of price controls actually reduced inflationary pressure for the global economy. Although China’s trade quantity is large, the growth rate of China’s export product prices remains small.

Haitong Securities believes as the Lewis turning point is approaching, the labor costs are gradually rising. The persistent promotion of the urbanization and a series of changes in the global economy also promoted the development of China to face the environment with higher resource prices and higher supply chain costs, which will have some impact on product prices.

Sheng Laiyun, spokesperson for the National Bureau of Statistics, recently said that it is not easy for China to control the consumer price index (CPI) at 5 percent in the first quarter of 2011 because prices of commodities in almost all emerging economies are in an inflation state under the very sufficient international liquidity. In March, the CPI of Brazil stood at more than 6 percent; the CPI of Russia stood at nearly 10 percent and the CPI of India is estimated at around 9 percent. The economic growth rates in these countries are lower than China. However, their price increase is higher than China.

Increases in labor costs are natural and reasonable

China’s rising labor costs in recent years have led to some criticism. Admittedly, the wages of Chinese workers have been rising steadily, but they are not sharp increases. In fact, the growth rate of Chinese workers’ wages was just around 10 percent in recent years, no higher than the increases in workers’ wages in other countries, said Gao Wenshu, an associate researcher at the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences.

Gao explained that the rising labor costs are a result of China’s rapid economic development, changes in its demographic structure and the income distribution reform. Increases in labor costs do not necessarily mean increases in final product prices. The share of labor costs in product costs is in fact very low and is even less than 10 percent when it comes to processing trade. Therefore, even if workers’ wages increase, the effects on world commodity prices would be extremely limited. Furthermore, world commodity prices are determined by both supply and demand sides rather than merely labor costs. Whether increases in labor costs will lead to increases in product prices depends on the world market situation.

In fact, it is inevitable that China’s advantage of low-cost labor force will gradually weaken as the economy develops. Zhu said that China will speed up transforming its economic development pattern during the 12th Five-Year Plan period (2011-2015). In other words, it will rely less on natural resources for economic development and attach greater importance to scientific progress, improvements in labor force quality, and management innovation.

“In the transformation process, the increase in labor costs is totally in line with the general principals of economic development. Those who accused China of exporting inflation either were misguided or have ulterior motives,” Zhu said.

via Criticizing China for exporting inflation unjustifiable – People’s Daily Online.