China's latest export

Chinese inflation: Chinese exports have been one of the main global deflationary forces of the past decade. That’s changing. Exports rose 35 per cent in November — largely due to higher prices, not global economic recovery. Factories are passing on more expensive raw material costs and rising domestic wages. The cheap yuan makes it easier for them to do so.

One sign of inflation is that the value of exports is rising by more than volume. This was the case in 14 out of 18 export categories during the first 11 months of 2010, according to Customs data. These include commodity-related items such as sugar, oil and heavy metals. Electronics and equipment prices also rose. The value of exports of automatic data processing equipment was up 36 per cent, while volume rose by 30 per cent.

Rising commodity prices are partly to blame. The unit price of imported iron ore is up 60 per cent in the past 11 months. But higher labour costs are also a factor. A dozen Chinese cities raised minimum wage standards at the start of 2010. The income of urban dwellers was up 10.2 per cent in the first half of 2010, according to the Statistics Bureau.

Evidence of higher prices is troubling for Beijing. Consumer price inflation may rise above 5 per cent in November to hit a 28-month high, according to state media. This adds to fears of overheating and may require the government to take more stringent measures.

So far, Beijing has been tightening through its preferred channels. In an effort to mop up liquidity, the People’s Bank of China raised bank capital requirements by 50 basis points on December 10 — the sixth such increase this year.

The weak yuan has also helped Chinese producers raise prices. The currency depreciated on a trade-weighted basis in October and November. True, inflation makes exchange rate adjustments through the back door: even if the authorities hold nominal exchange rates more or less steady, Chinese goods are getting more expensive. But this is hardly the ideal solution. If China allowed the yuan to appreciate, imports would become cheaper, exports would slow and price pressure would ease. That would make further interest rate increases less necessary.