Inflation, rising food prices, hit Chinese pocketbooks

Rob Schmitz Nov 26, 2010


Tess Vigeland: Call it the McDonald’s index. The fast food chain is raising the price of a burger, fries and coke at all of its twelve hundred locations in China. It’s the latest sign of sky-high inflation to hit the world’s second biggest economy. The Chinese government will try price controls and raising interest rates to curb inflation, but will it be enough?

Our China Bureau Chief Rob Schmitz reports from Shanghai.

Rob Schmitz: Ivy Li just bought a pound of kiwis and two pounds of oranges at a fruit stall near her office in Shanghai. Pop music from the shop next door fills the street, but Li’s not in the mood for it. She feels like she just got ripped off.

Ivy Li: The prices have gone up so much! All this fruit costs around 40 percent more than it did last year.

You know things are bad when the price of rice goes up in China. The country’s staple grain is up 60 percent from a year ago. The government’s blamed crop damage from summer flooding on high food prices, but it’s becoming clear there’s more to the problem. Li’s not sure what it is, but she knows what it isn’t.

Li: This isn’t the government’s fault. It’s because foreign companies are coming to China and competing unfairly. The government just needs to figure out what to do.

If only economists shared Li’s theory. China Economist Andy Xie says Beijing hasn’t done much about inflation, because it doesn’t want to admit what’s really wrong.

Andy Xie: The reason why the government has been so slow in handling inflation is because it touches on the core issue of income distribution.

Xie says more money is flowing to the government than to the people. Local governments are flush with cash from property taxes, and state-owned enterprises aren’t doing bad, either. But wages for Chinese workers aren’t keeping up. When you add record-breaking inflation to the mix, you’ve got a problem, says Xie.

Xie: Every episode of social instability in China originated with inflation.

The thing is, China’s government has a good memory for this sort of thing. Xie says it’s a good bet Beijing will raise interest rates again before the year is through, another measure to try and curb inflation.

In Shanghai, I’m Rob Schmitz for Marketplace.

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