One of the hottest topics in China right now is “inflation.” Not only in this year, but in fact in the past few years, inflation has become an increasingly important topic in China. People talk about it every day, people feel it every day. We are highly influenced by this economic phenomenon, which effects our daily life down to the price of bare necessities: vegetable oil, vegetables, eggs and pork all saw major increases in 2010 and what is worse, this inflation is being experienced throughout all of China.

To see how it has effected my daily life, I’d firstly like to share something really good that has come from inflation.. My mom has been in her company for about 3 years, and in that time, her salary has doubled! (All without having been promoted) So from this point of view, I kind of like this inflation. I believe not so many people, however, have been this fortunate. Her salary has been increased with every upward adjustment of “Beijing minimum wage standard.” It is in this way that most people are suffering from this inflation. Everything is sold at a higher price, thus if salaries do not increase, this causes a real decrease in salary. To be honest, there are some items, particularly e-products, that have seen price decreases, but this has nothing to do with the inflation, but rather because of the rapid development of technology! There are some brands I have noticed costing as much as 50% less than before. This is mostly a benefit from China’s rapid economic and technological growth.

Recently I read news from China's quarterly macroeconomic model (CQMM) 2011 Spring Forecast: in 2011 China's economy is expected to continue the growth of 2010: GDP will grow by more than 10%, but this will also cause greater inflationary pressure, with the CPI likely to exceed 5%, causing serious inflation. So basically what we are facing in 2011 is high speed economic growth and continued high inflation.

Building and Housing Costs

Now I want to relate a story on the negative effects of inflation. I have an uncle who is a building contractor, who recently told me during a family reunion that this year in 2011 costs for building per 250 square meter will increase by about 15,000 Yuan (nearly US $2,307.7) compared with last year. This is mainly because of raw material costs like lime, gravel, sand, brick, soil and the increased labor cost. He told me about ten years ago, for a bricklayer the daily wage was about 40 Yuan, or about US $6.20, but that has now increased by about 100 Yuan, or US $15.40, almost 2.5 times higher.

The stunning Chinese real estate industry is one where the effects of inflation are most apparent. Ten year ago it was about 200,000 Yuan for a 100 square-meter apartment in Beijing. Currently that number has risen to 1.5 million Yuan (the figures are estimates for a middle-level price in Beijing, Tongzhou district). For the middle class, we can hardly imagine buying an apartment by ourselves. Most of my cousins have chosen to pay the down payment first, which is about 450,000 Yuan for a 100 square-meter apartment in 2010. Then they need to pay by installments for the next 20 years. This, in effect, makes you a “slave to your house,” tying you to your home payments. This cost of for 450,000 Yuan is a very big amount for a new married couple, those who are most frequently in the market for a new home and who always don’t have this much money available. This then passes the burden onto the parents. A typical middle class employee in Beijing makes about 7000 Yuan per month. So if they want to buy an apartment, you can see how long it would take for them to realize the “Chinese dream.” Some of my relatives got lucky; they got demolition monetary compensation which can supply with enough money to buy about 3 or 4 separate apartments. This is equivalent to becoming a millionaire by winning the lottery! This is fortunate for those living in the suburbs betting that the area will soon become developed.

How this Affects the Sourcing World

I can also the effects in my own day to day work in the sourcing industry. Nearly all of our cooperative factories have been quoting higher prices mainly because of the higher raw material and labor costs. The factories complain that they have to raise prices even though they know they may lose their clients. Thus, the situation is negatively impacting Chinese foreign trade business greatly. In addition, the US dollar has been devalued a lot next to the Chinese RMB, increasing the difficulties for foreign trade. Particularly for the smaller factories who have to shut down once their low price advantage has been lost.

What are the reasons for these rising prices? Some reports say the main cause of inflation is the rapid pursuit of economic growth resulting in excessive expansion of investment demand. So to restrain the excessive expansion of investment demand, we must control the rate of economic growth. If we do not control the rate to about 9% this year, the goal of controlling inflation will be difficult to achieve. Since last year, China's price level has continued month by month climb, though controlled somewhat. The CPI for January and February of 2011 is nearly 5%, lower in fact than last November which was 5.1%. Currently the soaring international commodity prices have also put a lot of pressure on the domestic inflation inhibitors. Oil prices have continued to surge, reaching close to US $100 dollars a barrel; iron ore prices increase are almost without pause; international food prices rfom October 2010 to January 2011, in less than a half year, rose sharply by 15%. This has become a major domestic policy concern for the government as China's continued rising price inertia has apparently settled in, making any short term drops highly unlikely.

The Good and the Bad

On one side this inflation is an indication that the living standard of the Chinese has really been improving, but on the other hand this improvement always has has been followed close behind by its companion “inflation.” People have more money, but at the same time their money is being devalued. Most economists believe that the inflation is doing more harm than good for the development of the national economy as a whole. For workers, if the growth rate of wages is less than the inflation rate, this will simply lead to a decline in real purchasing power but not improve the actual living standard; for enterprises, because of price signal distortions, it is for this market boom to be an illusion, causing blind expansion of production scale and inefficient investing.. If hyperinflation sets in, the economy will be in chaos: devaluation of paper currency, factory closures, and massive unemployment increases. Thus, those in power are not standing idly by: to restrain inflation, China has recently announced further measures to stabilize consumer prices and provide more support for low-income groups. Macro-control measures may help to change the market inflation expectations to some extent. Let’s pray this works and that China’s economy can continue on its historic path of economic growth while avoiding this inflation threat.

Author: Karen Li; Sourcing Associate