Horns of dilemma

China: Chinese Premier Wen Jiabao once said 2009 would be China’s toughest economic period in fifty years. He wasn’t thinking ahead. In 2010, policymakers face a seemingly impossible mission — continuing 2009’s growth of 8.7 per cent while curbing resurgent inflation. December’s figures show the government is already behind the curve.

The annual inflation rate for consumer prices was a seemingly mild 1.9 per cent in December. But that number understates the threat.

The consumer price index excludes the rapidly rising cost of property. And year-on-year changes miss the most recent trend. In the most recent month, prices rose 0.8 per cent — a nerve-wracking 10 per cent annualised rate.

Food prices, which made up 90 percent of December’s annual CPI increase, are rising fastest. Bad weather doesn’t help. But easy money is what turns shortages into much higher prices.

Producer prices are now rising at an annualised 11 per cent. Those increases are being passed on to consumers — China’s two leading alcohol brands have raised prices by around 10 per cent and Coca-Cola is threatening to follow suit.

Non-food prices are not exempt either. Makers of cars and home appliances face rising costs and are no longer under pressure to cut inventories through cut-price sales, not after respective 58 and 25 per cent revenue increases in December. Price rises look inevitable.

Welcome growth and excessive inflation have the same monetary source — a flood of bank lending.

A rate hike would now be the best medicine, but it comes with uncertain and possibly hazardous side effects. Fragile parts of the economy, like private investment and services, could be hurt. Some debt-funded construction projects — there was a mammoth 4 trillion yuan ($586 billion) of infrastructure investment in 2009 — could be delayed.

There are other buttons Beijing could push, but they are no more attractive. Revaluing the too-cheap yuan would cut producers’ imported commodity bills, protect consumers from some price hikes and curb speculative liquidity from overseas, but at the cost of export jobs.

Premier Wen may yet yearn for the halcyon days of “tough” 2009.