Inflation in China

Submitted by Marco Palmero on 3 February, 2008 - 16:46

Inflation in China

Have you ever stopped to think: What would be the effect of inflation in China affect us? About ten years ago a decent sized donut at my local shops would cost 80 cents. Now they would be 2 dollars. Sunny boys (ice blocks) would be around 40 cents and now they could fetch up to $1.20 for a bit of flavoured ice. Now, everything around is made in China. The peanut butter I ate this morning came from China, the laptop I'm typing on is Chinese, my seat is Chinese as well as probably all my luxury products like Clothes, TV's and DVD players. Inflation in China is sure to influence the temperament of the global economy. Heard of the saying, "if the US sneezes, the world catches a cold"? How about a new saying, "If China sneezes, the world catches pneumonia"?

If China sneezes, the world catches pneumonia

Yes, goods from China are dirt cheap. And they have been for years - their prices has been falling for years. But a new trend is rising - Chinese goods sold in the United States have risen for the last eight months. Inflation in China is being pushed into reality as a result of soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports. China had a 2.4 percent rise in inflation over the last year while the Unites States had an inflation rate of 4.1 percent in 2007, up from 2.5 percent in 2006.

Could Chinese inflation signal the end of super-cheap goods from China? As the United States faces a possible recession - American consumers may see up to a 10 percent price increase in the price of consumer goods. Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing.

Why Chinese Inflation

"This is what I call the perfect storm," said Alan G. Hassenfeld, the chairman of Hasbro, one of the world’s largest toy makers, during a recent visit to China. "We've got higher labor costs and labor shortages, plastic prices have gone way up and we’re doing more safety testing." There are no reliable figures that exist about average Chinese wages, but experts say that factory wages have risen 80 percent or more in many coastal areas in recent years, with the lowest wage about $125 a month.

After years of complaints from the United States and Europe about China's growing trade surplus, authorities here have removed incentives that once favored exporters of cheap goods. Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, apparel, leather, wood and other goods, effectively taxing those industries. But the actions are also part of Beijing's desire to move China higher up the global manufacturing chain — away from the least- finished products, like plastic children’s toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles.

Chinese Factories had been struggling to cope with problems that included power shortages, higher raw material costs, rising wages and inflation in other areas. For instance, the cost of some types of plastic has risen more than 30 percent in the last few years because of higher oil or petroleum costs. Plastic is a major component in toys and other consumer goods.

Many Chinese factory owners say a tough new labor law, which went into effect on Jan. 1, complicates the hiring and firing process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages. Some factory owners say there have already been strikes and other turmoil over the interpretation of the new law and how it should be applied.

Analysts say Beijing is also stepping up its enforcement of environmental laws, putting added pressure on factories that had long skirted regulations. Adhering to those often ignored rules increases cost, too.

These changes take place against the backdrop of a dollar falling modestly against the Chinese currency. The US dollar is down about 7.6 percent in the last year against the Chinese yuan and is expected to fall further this year. The weaker the US dollar, the more expensive Chinese and other goods become when their prices are converted to US dollars.

Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing.

"Companies are now ordering for the spring of 2009," says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. "Factories are coming back and asking for 20, 30, 40, 50 percent price increases."

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