Analysis: Wage rises, reforms keep China inflation entrenched
BEIJING (Reuters) - Chen Xiaogang is having a hard time recruiting waiters for his restaurant, despite the near 20-percent annual pay hikes he's having to offer to attract some of China's lowest-skilled staff.
"Every restaurant is short of workers and we have to raise salaries," said Chen, a manager at the "Triple Ears" hot-pot outlet in Beijing's vibrant Dongzhimen nightlife district.
Chen has boosted basic monthly pay to 1,600 yuan ($250), 200-300 yuan more than last year, offers bonuses and other benefits that roughly double take home wages. He still can't get enough staff to cope with a solid increase in business.
A tight jobs market and rising base wages -- often well above officially-mandated minimums that rose an average 22 percent in 2011 -- are key to the risk of entrenched Chinese inflation in 2012, despite softening economic activity that saw price pressures cool towards the end of last year.
"Inflation is coming down, but there are still a lot of tailwinds and structural forces behind price rises," Kevin Lai, economist at Daiwa Capital Markets in Hong Kong told Reuters.
Double-digit wage rises are not the only ones.
Government policies designed to spur domestic consumption and rebalance the economy by boosting imports are also at play. So too are long-planned reforms to a raft of administered prices that economists say are more likely and easier to be implemented as overall economic growth rates cool.
Furthermore, the legacy of China's 4 trillion yuan fiscal stimulus and lending frenzy in the wake of the 2008/09 global financial crisis means there is still plenty of easy money sloshing around the world's second-largest economy.
Consumer and food inflation: link.reuters.com/waf95s
China imports and exports: link.reuters.com/ked55s
Offshore forwards: link.reuters.com/ref95s
China FX Purchases link.reuters.com/sef95s
Inflation has clearly been on a downward slope since hitting a three-year annual peak of 6.5 percent in July and data on Thursday showed the rate had eased to 4.1 percent in December, down for a fifth straight month.
But that still meant inflation had come in above 2011's official 4 percent target in each of the last 12 months, delivering an average rate of 5.4 percent for the year.
Meanwhile, an uptick in the annual rate of food inflation to 9.1 percent in December from November's 8.8 percent -- the lowest since September 2010 -- would be troubling if it signaled a rebounding trend in the cost of basic foodstuffs.
Food prices remain the biggest driver of discretionary consumer spending in an economy where average monthly salaries are just 3,000 yuan ($476).
There are many reasons why China's central bank chief, Zhou Xiaochuan, has warned against complacency over inflation.
"We should not loosen policies to rein in excessive consumer price gains, and reasonably manage inflation expectations," Zhou told the Xinhua news agency in an interview published on Sunday.
INFLATION BOTTOM SEEN SOON
Indeed, there are few signs that China will slip towards deflation as it did in 2009, with economists widely forecasting inflation to bottom out at 3 percent in the first half of 2012.
The economy is more resilient than three years ago and deteriorating demand for goods from the country's vast factory sector have already seen the government start to pursue more policies to boost growth.
"The chance for a very low inflation is very small, because China's policies are flexible," said Ting Lu, China economist Bank of America/Merrill Lynch in Hong Kong.
"If inflation is declining faster than projected, the government will likely seize the opportunity to carry out power tariff hikes and other price reforms, which would be difficult when inflationary pressures are high," he said in a note to clients.
Beijing has long-pledged to reform its resource pricing regime to help conserve resources and curb environmental damage as part of efforts to change its economic development model.
China's top planning agency wants to raise government-set prices of power, natural gas and heating soon because inflation has eased.
The government has been reluctant to raise domestic energy prices despite considerable increases in supply costs, fearing rapid price hikes would stoke inflation and cause social unrest.
That is especially the case if one of the most important structural features in China's economic landscape has changed -- the steady urban migration of millions of rural workers which has delivered a hitherto unrestrained supply of industrial labor.
Many economists believe China may have already crossed the so-called Lewis turning point, meaning that all excess rural labor has already been absorbed by urban areas and that structurally higher wages -- and inflation -- lay ahead.
Many provincial authorities have rushed to increase minimum wages, in line with central government plans to boost spending power and domestic consumption, despite warnings of tightening labor supply from factory bosses.
Meanwhile, easy money is still sloshing around the economy despite policy tightening that brought money supply growth down from a breakneck -- and dangerously inflationary -- pace close to 30 percent in late 2009, to 13.6 percent last year.
China's M2 money supply hit a staggering 85 trillion yuan ($13.46 trillion) at the end of 2011, equivalent to 210 percent of GDP in 2010 -- one of the highest in the world.
That growth has fuelled inflation risks as China's closed capital account has forced the central bank for decades to print local currency to sterilize sustained inflows of foreign capital generated by energetic exporters and assiduous inward investors.
Excess liquidity has been blamed for the so-called Chinese "stir-frying" or asset-price speculation in recent years in everything from real estate and redwood furniture to garlic and green beans.
Chinese officials and policy advisers also fear that Western central banks, still boosting money supply to revive growth in the wake of the financial crisis, could reignite commodity price rises and fuel imported inflation.
Zhang Zhuoyuan, an economist at the government think-tank Chinese Academy of Social Sciences, reckons that China may see annual inflation hovering above 4 percent until 2013.
"The main reason of the current inflation cycle is the excessive money issuance in the past few years, and inflationary pressures caused by that cannot be released completely in 2012," he wrote in an article in Chinese Caixin Century magazine.
($1 = 6.3150 Chinese yuan)
(Reporting by Kevin Yao; Editing by Nick Edwards)
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