David Li argues that China too is affected by global inflation in food prices. As a net importer of food grains, it must plan its food policy with care if it is to sustain its labor-driven economy.

One of most discussed changes in Chinese society is the rise of the middle class. This has led to greater demand for food and, since an increasing part of the diet is meat, there are inevitable inflationary pressures as to food. This trend, along with China’s hunger for natural resources, was a major factor for the rise of commodity prices around the world in the past few years. Because food consumption in China relies on imports, prices rose as worldwide supply could not keep up with this influx in demand.

Rising food costs in China are also spurring the rate of overall inflation, forcing China’s Central Bank to consider restricting the money supply by raising interest rates and bank reserves and discouraging banks from giving out credit.  Chinese banks are now required to hold up to 19.5 percent of deposits in cash, with further increases possible. The US in contrast requires its banks to hold a mere 10 percent.  This restriction in money supply is likely to  abet the Renminbi’s slow appreciation against the dollar and also help combat inflation. While this may cool the price of commodities, it also has the potential to limit China’s ever-expanding economy. Many of China’s small businesses depend on loans to drive job creation and spur economic growth, and without this money, re-investment  into the economy will drop. The fear of this possibility has caused the Shanghai Composite Index to fall 13 percent since its high in April.

The data this past January showed a lower than expected inflation rate of 4.9 percent, but the number has indubitably been influenced by a recalculation in the inflation index to give more weight to housing prices instead of food prices, making it impossible to compare with previous inflation numbers. The number remains stubbornly high despite the Central Bank raising interest rates three times in the final quarter of 2010.While wage increases, which help consumers pay for the higher cost of food, have been greater in China than in other Asian countries, this has led to greater food demand by those who have benefited, which leaves the chance for a prospective “wage inflation spiral,” where wages and prices take turns increasing. The Chinese statistics bureau gauged in February that food prices were 10.3 percent higher than a year before, with vegetable prices 2 percent higher, fruit prices 35 percent higher, and grain prices 15 percent higher. Another consequence of raising wages to compensate for food prices is that companies in labor-intensive industries may move into lower-cost countries such as Vietnam and the Philippines as a result of the rising cost of labor and materials inside China.

Though China is trying to stimulate domestic demand for goods and services as its preferred method of economic growth in lieu of export-led growth, the rise in food and energy prices will continue to raise the cost of living, and thus depress the effectiveness of such a strategy. This could produce a seismic event should a sharp rise in food prices coincide with social unrest. Potential sparks for such an event can already be seen in events like the recent riot in Guangdong, where a woman was beaten up for complaining about a toll in her district. The pressure to find some sort of solution to prevent such a worst-case scenario is mounting. Banks such as Standard Chartered predict that the peak of inflation has yet to be seen, with currents rates expected to increase for at least the next few months. While China is not at risk of hyperinflation, the rising cost of food is foremost on the minds of policy planners and Premier Wen Jiabao, who stated earlier this year that the government would make moves to reinforce the food supply and stabilize prices.  China is caught in a bind having to balance the demands of an export oriented economy with that of millions of workers and families beginning to be buffeted by food inflation.