18 Nov, 2010

Inflation in China accelerated to 4.4% in October, with food prices rising 10.1%. The Chinese government will be providing poorer households with subsidies in response to double-digit food price inflation. The government has also said that price controls would be exercised if current grain and vegetable shortages worsen. In the meanwhile, the Shanghai stock exchange has fallen nearly 10% in four days due to rising fear of increase in interest rates in response to the price rises.

In October, the People's Bank of China raised interest rates unexpectedly in response to growing inflationary pressures. Consumer price inflation reached 4.4% in October, its highest level in two years, up from 3.6% a month earlier. Fears of shortages getting exacerbated due to food hoardings have stormed the market due to the average wholesale price of some vegetables in China rising by nearly two-thirds in the first 10 days of this month. It is also thought the government may be considering stiffer penalties for those caught hoarding food.

After industries reported shortages in the supply of fuel, the government also announced that it would raise diesel supplies.

Beijing's recent criticism of the US Federal Reserve's resumption of quantitative easing (QE) can be attributed to China's inflation problems and the concomitant threat of civil unrest. The dollar may be weakened by the Fed's new round of QE, making Chinese imports less competitive in the US.

In order to be able to maintain a competitive exchange rate with the dollar, the People's Bank of China would have to intervene to buy more dollars and sell more yuan. This, however, further increases the risk of fuelling inflation, as well as asset bubbles in property and stocks.

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