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China Sees Hints of a Past Threat: Inflation

China Sees Hints of a Past Threat: Inflation

Historically, inflation has been a major political and economic issue in China, a consequence of a hard-charging economy as well as previous bouts of runaway lending by state banks. Both can set the stage for surging prices, and at times they have surged indeed. Inflation contributed to the 1989 protests in Tiananmen Square.

But for nearly a decade, inflation has been of little concern. Years of heavy investment left the country with overcapacity in practically every industrial sector, from coal mining to steel making to shipbuilding. That makes it difficult for companies producing those goods to raise prices. This could be ending, however, as China pursues efforts to pare overcapacity.

China has also invested heavily in education, so the productivity of workers has risen quickly along with their wages. As a result, labor costs for getting jobs done have changed fairly little, as higher paid yet more skilled workers complete tasks more quickly than lower-paid but less-skilled workers a decade ago.

That too may be changing over the long term, however, as China’s now-defunct “one child” policy and an unwillingness to have children leads to a shrinking of the labor pool.

China’s official inflation figures have been tame, but people inside and outside the country widely disbelieve them. Western experts contend that the country’s consumer price index broadly understates the effects of ever-rising housing costs. The index also understates a large number of lesser trends, including the shrinking size of meal portions in restaurants and changing fashions in clothing, they say.

Wigram Capital Advisors, an economic research group, has long calculated an alternative price index for China by taking government data on specific consumer goods and services and assigning them weightings based on actual household spending patterns in big Chinese cities. It shows that the annual rate of inflation jumped to 3.6 percent by July, from under 2 percent most of last year.

Check the Chinese term for “rising prices” on Baidu, a Google-like online search engine, and the mentions quintupled in the second half of August. But the usage of a more intellectual term for “inflation” has changed little in recent months — a possible sign that most of the complaints about rising prices may be from less affluent Chinese citizens who are more affected by higher costs for basics like pork and vegetables.

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