beyondbrics

To understand China’s battle with inflation, consider the pig: Chinese eat about half a grown hog on average every year, making China the world’s biggest consumer of pork. However pork prices have soared 40 per cent since the beginning of the year, which has been a big contributor to inflation, which hit a three-year peak last month.

It’s with great relief then that the government announced pork prices will level out in the second half of this year, according to an interview Friday with the powerful National Development and Reform Committee published in the 21st Century Business Herald.

“Pork supply will catch up with demand in the second half of this year,” the unnamed official said. China’s Premier Wen Jiabao has been fixated on pork prices too, mentioning the issues in three separate speeches in the last two weeks.

In another attempt by Beijing to demonstrate it is working to dampen inflationary pressures, the Commerce Ministry said on Friday that the government will release frozen pork into the market “in due time”. However, the consensus among analysts and pig producers is that the government doesn’t have enough stockpiles of pork to really make a difference.

Pork prices in China are governed by a 36-month cycle of gluts and shortages that has kept prices very volatile. The cycle is a function of the fact that backyard pig farmers account for a large percentage of production—around 40 per cent—and they are extremely sensitive to price fluctuations so will stop breeding pigs when prices fall. When prices rise however it takes about a year to breed pigs from inception to maturity, a lag that then causes shortages and higher prices.

The silver lining is that if prices stabilize in the coming months, it will be a boon to the government’s battle against inflation. “This will leave some room for policy makers to move toward a less restrictive policy stance,” said Yu Song, economist for Goldman Sachs. “It’s going to have a modest, positive impact on GDP growth in the second half.”

If pork prices stay level for the rest of this year, that will still mean a decline in price growth year on year because of a higher base at the end of last year. The impact on inflation could be significant: In June the consumer price index rose 6.4 per cent year on year, but would have risen only 5 per cent if pork prices are excluded, according to data from the National Bureau of Statistics. If the National Development and Reform Commission is right, soon Beijing’s economic planners could have all their pigs in a row.

Related reading:
Why Pork Prices Are Such a Big Deal in China, China Real Time
China’s economic chess game, beyondbrics
How China will crash and burn, Forbes.com
China rates, Lex on ft.com
China debt – Moody’s flying guess, beyondbrics