China Inflation Data Second-Guessed as Housing Prices Rise

Aug. 26 (Bloomberg) -- Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 percent in the past year.

Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. “The workers suffer,” he says. “Everybody is crying.”

Officially, China’s consumer price inflation topped out at 3.3 percent in July compared to a year before, a 21-month high. Officials say the spike is a one-off caused by crop damage from recent flooding. Other costs, they say, such as cars, mobile phone bills, and clothing, are falling, and pressure on prices should ease as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, said the inflationary threat was “overhyped.”

Consumers, investors, analysts and academics interviewed by Bloomberg BusinessWeek in its Aug. 30 issue beg to differ.

“There has been a jump in prices that isn’t reflected in the numbers,” said Chinese Academy of Social Sciences economist Yu Yongding, a former adviser to China’s central bank.

Michael Pettis, a finance professor at Peking University, said he wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register a price rise of a few percentage points. Multinationals in China expect to raise wages an average of 8.4 percent this year, according to Hewitt Associates Inc., a human resources consultant.

Ordinary Chinese

Ordinary Chinese have yet to see increases in their housing, education, and medical expenses reflected in the official numbers, these analysts said.

“Inflation could well be 6 percent now for most people in China,” Peking University’s Pettis said.

If the doubters are right, then the government has an inflation problem that it either hasn’t figured out how to measure, or has chosen to ignore. Other vital Chinese statistics, like retail sales and unemployment, have also been murky. In the case of inflation, misjudging could prevent the kind of swift action needed to tame prices now, and force the government to apply harsher measures later, such as an increase in interest rates or an appreciation of the currency to curb growth. There are political risks too: Social unrest in China has been triggered when ordinary workers can’t keep up with the cost of living.

Data ‘Oddity’

Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs called an “oddity.” An official with the statistics bureau said there has been no major change in the basket that makes up the price index since 2005. Plans call to adjust the weighting next year to reflect housing costs more and food prices less, said the official, who declined to be identified because of agency rules.

Chinese consumers, when asked, will detail how household expenses have changed in the past decade. Medical costs are the No. 1 concern for 84 percent of China’s rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 percent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care.

Housing and rising rental costs also eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment just increased more than 20 percent, to $338.

Too Expensive

“It’s too expensive,” said Wang, who works in the Beijing office of a Hong Kong advertising company. “I’m thinking of moving.”

Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to cities, pushing up rents and food prices in urban coastal areas. The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in Chinese cities, has risen from around $10 in 2008 to about twice that today, said Zoe Wang, a 29-year-old strategy consultant from Shanghai.

“Unfortunately, my salary didn’t double,” she said. Official figures only record a 0.4 percent rise in recreation and education costs this year. China doesn’t separate these two categories in its figures.

Residents in far-western China face higher prices in part because of the long distances products must travel to reach them. A fast-growing population of pensioners feels price increases much more acutely than others.

Pensions Spent

Said retiree Wei Mingxiang, 54, as she shopped carefully in Beijing’s Rundeli vegetable market: “Prices have gone up too far. My entire monthly pension of $147 is spent on food.” One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.

By periodically releasing wheat, rice, and corn from its reserves, the government has avoided the 100 percent price surge that hit global grain markets in 2007 and 2008. Beijing continues to cap prices on everything from phone bills to water, electricity, and fuel prices, and when it wants to cool growth the government orders banks to stop lending.

“The government has tended to use less mainstream instruments that economists don’t like so much,” said Kuijs of the World Bank. “And they tend to use interest rates less.”

Deposit Rates

One-year deposit rates at 2.25 percent have not been changed since November 2008, which means Chinese savers are actually losing money now that inflation has passed 3 percent. Officials fear higher rates could draw speculative investors into China.

Some analysts said that Beijing is doing a decent job of calculating prices. Arthur Kroeber, the Beijing-based managing director of economic consultancy Dragonomics, estimated that actual inflation may exceed the official figure but by not much more than one percentage point. Kroeber added that a tightening labor market and rising wages will push China into higher inflation in the coming years.

Others wondered whether the historic aversion of China’s rulers to the political risks of inflation creates pressures to keep official figures low.

Factory Jobs

Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China’s factories laid off tens of millions of workers, some economists said.

“The government has made it quite clear” what its inflation target is for 2010, Tsinghua University management professor Patrick Chovanec blogged on Aug. 12. “A whole parade of official sources have issued statements over the past few weeks predicting, with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck, that inflation will come in right at 3 percent this year.”