Fears that surging global food and energy prices will trigger rising social tensions in China have escalated following reports of an outbreak of protests by truck drivers at Shanghai’s major ports.
The protests began on Wednesday, with drivers blocking roads with their trucks and demanding the Chinese government take action against rising fuel prices. On Thursday, around 2,000 truck drivers reportedly confronted baton-wielding police near Shanghai’s biggest port, and strikes also broke out in other ports in the city.
The truck drivers’ protest comes as many question whether China is doing enough to combat mounting inflationary pressures. China’s inflation rate hit 5.4 per cent in March, its highest level in almost three years, while food prices surged by almost 12 per cent.
The People’s Bank of China, the country’s central bank, has responded by nudging interest rates slightly higher. Earlier this month, the bank announced its second interest rate for the year. As a result, the interest rate for one-year deposits will rise to 3.25 per cent, while the one-year lending rate has climbed to 6.31 per cent. The central bank has also imposed limits on bank lending by hiking the country’s reserve requirement ratio to a record high of 20.5 per cent.
But critics point out that Chinese interest rate hikes have barely kept up with inflation, and that, after adjusting for inflation, Chinese interest rates are negative. They estimate that China’s interest rates will need to rise by a further 2 or 3 percentage points in order to combat rising price pressures.
Faced with mounting social unrest, the Chinese authorities are relying more heavily on administrative controls to combat rapidly rising inflation.
Earlier this month, Unilever, the giant Anglo-Dutch consumer goods group, decided to postpone planned price rises on household staples, such as soap, shampoo and laundry detergents, after talks with Chinese authorities. Chinese shoppers had emptied supermarket shelves of such items following reports in state-owned media that major companies were planning price rises of between 5 to 15 per cent, from the beginning of April.
The Chinese government also sets the price for diesel and other fuels, and has tried to cushion the local economy against some of the adverse effects of soaring global oil prices. So far this year, the state-set price for diesel and gasoline has increased by around 10 per cent, even though the price of crude oil in global markets has surged by more than 20 per cent. But, as the latest truck drivers’ protests demonstrate, such price controls are not sufficient to quell rising outrage over higher food and energy prices.
The People’s Bank of China – the country’s central bank – has long pushed for allowing markets to have a greater role in setting China’s interest rate and exchange rate policy. Analysts believe that China needs higher interest rates and a stronger currency in order to combat inflation.
But the central bank has powerful institutional opponents in China, who argue in favour of keeping interest rates low in order to boost economic activity. And there are also concerns that a higher exchange rate will reduce the competitiveness of Chinese exporters, many of whom already operate on wafer-thin profit margins. As a result, China’s response to rising inflation looks set to remain half-hearted.
Meanwhile, many worry that the longer the Chinese government delays raising interest rates, the more aggressive the tightening will eventually become. And this could cause Chinese growth rates to slump, and trigger a major drop in commodity prices.
