Fisher Investments Editorial Staff
Emerging Markets, Inflation, Politics

The Rising Cost of a Chinese Big Mac

By, 11/18/2010
 

Story Highlights:

  • The Chinese government announced steps intended to control rising domestic inflation, including possible price controls on some goods.
  • This move is the latest in a string of Chinese government efforts to curb rising prices.
  • Despite fears tightening would greatly curtail Chinese economic growth, the latest data prove they've been unfounded thus far.
  • Chinese lawmakers have every incentive to keep the economy growing at a rapid pace, and if price controls are implemented, it will likely be done gradually, limiting near-term impact.

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Portions aren't the only thing being super-sized in China. McDonald's recently raised its prices across the country—a move likely hard to swallow for the Chinese government, which just announced steps to control rising domestic inflation. 

Chinese inflation hit a 25-month high in October. The country's consumer price index was 4.4% higher than a year earlier. Food prices led the way with a 10.1% year-over-year gain. Indeed, McDonald's cited higher ingredient costs as reason for raising prices, illustrating how higher energy, beef, corn, and other prices can ultimately be passed on to consumers. Now, controlling prices seems to have moved to the top of the government's economic and social agenda. After all, a populace unable to afford basic goods and foods is unlikely to be a happy one. 

The price control measures could include placing temporary price caps on important daily necessities like food items, increasing the supply of commodities, and clamping down on speculative demand in certain markets. So far, the government hasn't provided specifics on the when's or how's of implementation—and actual implementation isn't yet an absolute given. Typically, government interventions in free markets inhibit the market's feedback mechanism and create negative distortions. But remember, China isn't a free economy by any means and has used price controls before (with mixed results). Though, for now, perhaps the government simply wants to signal inflation is on its radar and to gauge the announcement's impact. 

This move is the latest in a string of Chinese government efforts to cool demand plumping prices higher than desired. This year, China has raised reserve requirements for its commercial banks five times and taken steps to rein in property prices and lending. However, despite fears aggressive tightening would greatly curtail Chinese economic growth—an important driver of global economic growth currently—the latest data prove the fears have been unfounded this far. Chinese October industrial production climbed 13.1% y/y, retail sales rose 18.6% y/y, new loan growth increased to 19.1% y/y, and exports were 22.9% higher y/y as imports rose 25.3% y/y. The numbers show a distinct lack of contraction. 

Chinese lawmakers have every incentive to keep the economy growing at a rapid pace. Significantly curbing growth is as likely to jeopardize social stability as are surging prices. It's reasonable Chinese officials don't want their economy to overheat, but there's no incentive to clamp down on growth so much the economy hits the skids. While price controls do risk throwing a wrench into the churning economy, there are reasons to believe the government will ease into these measures much like its approach to currency revaluation. This gradual approach likely limits the near-term impact, giving Chinese policymakers and investors plenty of time to assess and digest the moves.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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