By George Chen
The opinions expressed are the author’s own.
How time flies. It’s already been the end of August and speculations naturally arise in the market about how China’s inflation readings will be for August. What did you hear?
The most optimistic views these days are that August CPI (Consumer Price Index) could decline to below 6 percent in terms of growth on year and even the most pessimistic views I have heard are that the growth is believed to slow down for sure in August, so probably 6.2 percent or 6.3 percent.
Sounds good? Wait a second. Why shall we care about August CPI so much? One month cannot tell the whole story.
If August CPI growth slows down as we will soon see the official release of August economic data in the coming weeks, it’s certainly good news for the central bank as well as for ordinary people in China who have been fighting with the fast inflation for already more than three years. But it’s not good enough, to be honest.
Yesterday, amid market talks about August CPI, I also heard something interesting from Mengniu, China’s top dairy product maker. ”We are confident we can at least maintain (first-half) margin levels in the second half,” Mengniu Chief Financial Officer Wu Jingshui told reporters after the company’s first-half earnings release. And he added the company might raise product prices and adjust its product mix to offset an estimated 3-5 percent rise in raw milk costs in 2011.
I shared the news on my Twitter-like Sina Weibo micro-blogging service. How is the response from my audience? Frustrated should be the accurate adjective to describe. Mengniu is the industry leader and if Mengniu leads the next and latest round of product prices hike, you can imagine how rivals will react. Or they might have already coordinated a bit on such price moves?
Mengniu is not alone as such price increases are not just happening in the dairy product business.
Chinese liquor maker Wuliangye also announced this week it will raise prices for its alcohol by 20-30 percent from Sept 10 and industry analysts expected Wuliangye’s local rivals will follow the path to maintain their profit margins too.
Now let me get back to the old question – will CPI rebound (if it declines in August, thanks to the recent fall of pork prices as some economists said) by the end of 2011 and then the first quarter of 2012 may see even worse data?
More investors are getting more convinced these days that in a choice between GDP or CPI, Beijing should fight to maintain GDP not CPI. That is to say Beijing may tolerate further inflation, although at a slower pace month on month, but it can’t afford to see economic growth fall sharply to 7 or 8 percent, as estimated previously by some economists.
As you can see from the decisions made by Mengniu and Wuliangye, Chinese enterprises certainly don’t want to bear increasing costs that will hurt their profit margins. So, at the end of the day, the victims of China’s rising CPI are nobody but Chinese consumers.
George Chen is a Reuters editor and columnist based in Hong Kong.
Photo: Reuters file picture