By Xia Yeliang (China Daily)
Updated: 2007-06-04 09:19

(The author is a professor with the School of Economics, Peking University)

How high can pork fly? The latest price hike has caught the attention of officials as well as the public.

Premier Wen Jiabao stressed after visiting several pig farms around the country that measures must be taken to protect the interests of consumers as well as pig farmers.

An inspection group sent by the State Council also said that subsidies should be offered to low-income groups in cities and to college students.

Several factors are pushing up pork prices.

Edible oil and grain saw price rises starting early this year, which naturally led to rising prices in pig feed.

Corn, one of the major pig feeds, is now being used in large amounts to produce ethanol gasoline. As a result, pig feed is in relatively short supply and the price is high.

According to statistics released by the National Bureau of Statistics, the average production cost of livestock products climbed 11 percent in the first three months of the year.

Meanwhile, the outbreak of blue ear disease, also known as Porcine Reproductive and Respiratory Syndrome (PRRS), causing numerous pig deaths in several provinces in South China, was also a cause of a supply shortage.

The supply shortage is also a result of farmers' cutting back production last year because of low prices. The market was sluggish in the first half of 2006 with a record low price for pork in May 2006. Many pig farmers lost money and quit the business.

As pork prices gradually recovered later last year, farmers raised more pigs. But pigs need about one year to be ready to market. So pork prices kept rising.

Supply shortages aside, the demand for pork is driven by the booming income of the average urban family. This income rise, starting in late 2006, also accounts for the increased demand for pork.

Research by Goldman Sachs, the leading international investment bank, released on May 28 indicates that the continuous price increase in pork in recent months would probably push the rise in the Consumer Price Index (CPI) above 4 percent. The report also said that it is necessary for the People's Bank of China, the central bank, to raise the interest rate to check potential inflation.

The CPI rose by 3.3 percent in March and 3 percent in April, reaching the 3 percent inflation "alarm level" set by the central bank.

The pork price increase could soon lead to a price increase in other foodstuffs, the report said. As the meat price accounts for about 8 percent of the CPI, it could easily bring CPI growth over 4 percent if other food prices rise in coming months.

The report's predictions may be accurate. However, a CPI growth of 4 percent or even 6 percent is unlikely to ruin China's economic prosperity or people's daily life. This conclusion is supported by the predicted CPI rise being less than the predicted increase in personal disposable income during the same period.

Moreover, the renminbi has been appreciating recently on the foreign exchange market. The authorities have enough leverage to deal with even greater inflation with the huge foreign exchange reserve and enormous trade surplus, not to mention possible inflation of 4 to 6 percent.

Some observers believe the inflation is caused by overheated investments, especially the stock market frenzy. The market boom stimulates consumption.

This opinion does not hold water. One of the basic necessities of life, pork consumption does not alter dramatically with income growth.

When people have more money, they do tend to buy more pork. But their increased pork consumption stops at a certain point even if their income keeps rising. It takes a long time for the revenue from the capital market to translate into increased consumption in life's necessities.

Judging from a broad look at the Chinese economy, inflationary pressure is not overly strong. CPI growth of 3 percent, mild inflation, will not hurt the economic soundness or the standard of living unless it is coupled with a dramatic growth in the Producer Price Index (PPI).

Actually, a certain amount of inflation will help stabilize economic prosperity and growth.

It is far from reasonable to expect food, services and transportation to maintain their current prices or even decrease while people enjoy an average annual income growth of 10 percent.

When the economy achieves two-digit growth every year, consumer goods and investment goods should also rise in price. Thus, investors can expect a steady return from their investments and producers get reasonable profits.

Admittedly, the risk of excessive liquidity currently exists. Yet the economy remains one of high growth and low inflation, which is not going to be reversed in the short term.

The price rise in investment tools is unlikely to reach consumer goods. And disastrous inflation will not trouble China at this moment.

Of course, social groups at different income levels have different capabilities of coping with inflation. A food price hike obviously puts more pressure on low-income families.

The central government will help those suffering from the price rise. Special subsidies will be granted to help them through the temporary price hikes in consumer goods.