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Price Trend in 2008 and Policy Options


DRC Task Force on Macro-economic Performance

From January through February this year, CPI index increased by 7.1% and 8.7% respectively, year on year, drawing extensive social attention. Under the influence of various precarious factors, China witnessed both the pressure of preventing an overheated economy and inflation as well as risks of a possible economic downturn. Under such circumstances, the macro-economic policies should be worked out in line with the actual conditions and aimed at curbing a sharp price rise as well as maintaining the steady growth of the national economy and guarding against the drastic ups and downs of the economy.

I. A Basic Judgment of Price Trend in 2008

After an incessant rise in China's consumer prices since July 2006, the prices continued to go up steeply from January through February and, in particular, the price rise reached the highest margin in February since March, 1996. In terms of the factors driving up the prices, the pressure of price rise during the first half of 2008 is obviously greater than that in the second half of the year. The supply incentive policies, the retrenchment policies and the slowdown of the global economic growth will help weaken the pressure of price rise in the second half of the year. Such being the case, CPI increase is still likely to reach a relatively high level of around 5.5% in the whole year.

1. Snow and ice storms played an evident role in driving up the commodity prices in the first quarter

The catastrophic snow and ice storms hitting south China in the beginning of 2008 not only incurred huge direct economic losses but also caused a serious impact on the consumer price rise during the first quarter. On current estimates, the snow and ice storms will lead to a rise of 0.89 percentage points in food prices and increase the consumer prices by 0.28 percentage points for the whole year (calculated at the weight price of 31.96% constituted by food prices in consumer prices). The impact took place mainly in the first quarter. During the first quarter, the food prices would increase by 3.55 percentage points as a result of the snow and ice storms and the consumer prices would climb by 1.13 percentage points. That is to say, in the consumer price rise from January through February, over one percentage points were caused by snow and ice storms.

2. Pig supply will remain tight for a longer period of time, pig prices will remain high, yet the price rise will slow down

In 2007, pork prices jumped by 48.3% in China, which drove up the price level by 1.5 percentage points and contributed 31.3% in the consumer price rise, thus becoming a major factor for the drastic price rise. Since 2007, stimulated by market prices and aided by state policies, pig production has taken a positive turn for the better. The number of pigs raised by 20 key provinces under the supervision of the Ministry of Agriculture was recorded in January 2008 to have increased by 10.2% and the number of pigs becoming full-grown and ready for slaughter had grown by 15.5%. At present,pig prices are at the top of this cycle. In consideration of the pig farming turning from individual farming to mass and intensified farming, the outbreak of epidemics, the fact that a good number of piglets died due to the snow and ice storms and the rise in feed prices, it is estimated that the pig supply will remain tight for a longer period of time within the year, the pork prices will still remain high, yet the overall price level is tend to decline.

3. Prices of edible vegetable oil will remain at a relative high level

China's edible vegetable oil import, together with the oil made from imported soybean and rapeseeds, has accounted for around 70% of China's total domestic oil consumption. Prices of edible vegetable oil are mainly under the influences of the world market and it is hard for China to bring them under macro-control at home. In 2008, the enthusiasm of the Chinese farmers for soybean growing has been raised, but the output of the rapeseeds will inevitably reduce. It is predicted that the gap in oilseed supply will further widen. In 2007, American soybean output witnessed a drastic reduction, resulting in an aggravation of the contradictions in global oilseed supply and demand, and a price upsurge. It is predicted that prices of edible vegetable oil will maintain at a relative high level in 2008.

4. Grain prices are pressed for a rise

The bumper harvests reaped in succession by China over recent four years and the relatively stable grain prices have both played an important role in curbing an upsurge of the commodity prices. However, the grain prices are strongly pressed for a rise. Firstly, the grain production cost has gone up. Affected by the rise in prices of chemical fertilizer, seeds, agricultural film, diesel for agricultural use, mechanical work cost and employment cost, it is estimated that in 2008 the total cost for grain production per mu will reach RMB525 yuan, an increase of by about 50 yuan over 2007, and a 10% growth. The total cost for each 50 kilograms will reach 62 yuan, increasing by about 6 yuan over the previous year. Secondly, the grain prices in China are obviously lower than those on world market, and the world grain prices will produce a strong driving force. The reduction of the grain reserves of the main grain-producing countries in the world and the shortage of global food supply have suggested that grain prices on world market will continue to rise this year. As grain prices on Chinese domestic market remain stable on the whole, the gap between Chinese domestic grain prices and the world market prices will become wider and wider. In February 2008, the wholesale price of the high-quality wheat on Zhengzhou Grain Wholesale Market remained at 1,660 yuan/ton, being 2,000 yuan lower than the average FOB price of the American ruby winter wheat in the same period (US$509.4/ton, equivalent to RMB3,570.9 yuan/ton). In February, the wholesale price of the polished long-grained non-glutinous rice in China's major sales territories was 2,493 yuan per ton, being over 1,400 yuan lower than the CIF duty-paid price (over 3,900 yuan/ton) of the Thailand rice on world market. In February, the average price of China's Northeast corn was 1,130 yuan/ton, being over 1,000 yuan lower than the CIF duty-paid price of the No.2 Maize of the US Gulf of Mexico.

5. Price hike of raw materials and oil on world market is still playing a big role in driving up Chinese domestic commodity prices

With China's growing dependence on world market for oil and raw materials, in 2007 the prices of the staple products such as iron ore, nonferrous metal and crude oil rose by a wide margin, driving up the market prices of raw materials, crude oil and the relevant products on the Chinese domestic market. Under the influence of the supply-demand situation and affected by US dollar depreciation, the prices of oil and raw materials on world market will still show an upward trend in 2008. It is predicted by the Organization of Petroleum Exporting Countries that the price of the crude oil will reach US$80.00 —US$110.00 per barrel in 2008. With this impact,the raw material and crude oil prices on Chinese domestic market will continue to rise. Although the rise in raw material and oil prices has been partly digested at the processing or production links, the ex-factory prices of the industrial products will still rise by a small margin, which will drive up the prices of the industrial consumer goods as well as the household consumer prices.

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