Food Costs Threaten Rebound in China

BEIJING — Diners looking for beef hot pot on a chilly evening in Beijing pay more than their counterparts in Boston, a discrepancy that shows the challenges China faces in reviving growth as inflationary pressures return.

A 6 percent increase in food costs drove a rise in the Chinese consumer price index to 3.2 percent in February, compared with the same period a year earlier, a 10-month high, official data released Saturday showed. The index was 2 percent in January.

On Monday, China’s top economic planning agency, the National Development and Reform Commission, forecast consumer price inflation at about 3 percent for 2013.

Food prices typically rise in advance of the Lunar New Year holiday, which occurred in February this year. But since the holiday ended, meat prices, especially those for beef and lamb, have stayed elevated.

Retail beef prices in Beijing city markets are higher compared with supermarkets in the Boston area. Pork, China’s staple meat, is only about 50 cents per kilogram, or 23 cents a pound, below the U.S. price, a Reuters comparison of standard retail prices show. Those prices represent a direct hit on the spending power of Chinese, whose average income is about a 10th the size of Americans’ salaries.

Contributing to food production costs are the loss of farmland and farm labor to urbanization — Chinese cities are swelling as they absorb hundreds of millions of people.

Grazing restrictions because of land degradation are also causing costs to rise across the country.

“The more the economy develops, the harder it is to raise calves,” said Wang Jimin, who tracks cattle trends for the Chinese Academy of Agricultural Science’s Rural Economic Development Institute. “In the short term, I don’t see meat prices falling unless there are a lot of imports.”

After an international outbreak of mad-cow disease a decade ago, China allows beef imports only from Australia, New Zealand and Uruguay, so options to tame prices with imports appear limited.

For the near future, high feed costs will also help elevate the price of pork, an increase that is expected to drive broader inflation gains by the third quarter.

“It’s a question of fundamentals, not monthly C.P.I. fluctuations,” said Shi Tao, a livestock analyst at eFeedlink in Shanghai, referring to the consumer price index.

He said he expected a reduction in the pork supply this year because some pig breeders had decided to drop out of the business after losing money last summer.

Beef production in China has decreased every year since 2008, although it could rise by less than 1 percent this year, the U.S. Department of Agriculture estimates.

“Cattle take at least a year to raise, not like chickens, which need a few months at most,” said Yang Shaohui, a poultry vendor in Beijing. “Poultry producers can respond to the market much faster.” His chicken was selling for about a third of the price of the beef at a nearby stall.

The pressure on meat prices in China highlights not only the challenge of bringing inflation under control but also the drive to shift the economy toward consumer-led growth, Beijing’s stated goal after decades of export-led expansion.

“Accelerating food prices mean less growth in spending on other goods and services in the economy,” Carl Weinberg, the China-watching chief economist at the New York consulting firm High Frequency Economics, wrote in a client note.

A large increase in prices could jeopardize Chinese economic growth, which weakened in 2012 to its slowest pace in more than a decade. Growth only started to pick up in the fourth quarter after a seven-quarter slide.

It is a dilemma that China’s incoming leaders, Xi Jinping and Li Keqiang, might have hoped they would not have to face so early in the economic recovery.

“This year, I think, there are three priorities: to stabilize economic growth, which is not too big of a problem,” to stabilize the prices of goods, “where already it looks like there could be some pressure,” and to reduce the risk from hidden debt, like off-book wealth management products, said Zhao Xijun, deputy director of the Finance and Securities Institute at Renmin University in Beijing.

There are already indications that the Chinese central bank is shifting its policy focus to inflation from growth. China needs to control inflation as a priority, the central bank said in its fourth-quarter policy report in February, shifting from a pledge in its previous report to support the economy above other needs.

Rising food prices represent a sensitive area for the Chinese Communist Party leadership given that social tension has often accompanied price increases. Food price increases can fuel inflation expectations that lead to a broader rise in inflation and the risk that the central bank will tweak monetary policy to keep a lid on the price pressures.

But policy makers should resist the temptation for pre-emptive action, said Ting Lu, chief China economist at Bank of America Merrill Lynch in Hong Kong.

“Though policy makers should be wary of inflation later this year with an economic growth recovery, it’s too early to call for significant monetary tightening,” he wrote in a note to clients.

Article source: http://www.nytimes.com/2013/03/12/business/global/food-costs-threaten-rebound-in-china.html?partner=rss&emc=rss