Surge in China’s export prices
China’s economy is at increasing risk of overheating, outward signs being a tightening labour market and wage rises. Higher commodities prices and wage costs are now feeding through to consumer and export prices. The initially moderate rise in export prices is now becoming a sharp increase. If this trend continues, it will bring a period of low Chinese export prices to an end and contribute to higher global inflation.
Higher export prices from China
The labour market in China's industrial centres is tightening. In part, this can be attributed to a decline in the proportion of younger generations in the labour force owing to the one-child policy which began around 1980. It is precisely the younger age groups that migrate from the rural areas to the cities to find work. Consequently, the minimum wage in large parts of the country has been raised by 10 to 20 %. At the same time, prices in international commodities markets have doubled since the beginning of 2009. Chinese enterprises are now passing on the higher commodities prices and wage costs in consumer and export prices. In January and February of this year, consumer prices were 4.9% higher than in the same months of last year (chart 1). In addition, higher food prices are also driving up consumer prices. Food expenditures in China account for around a third of total household spending. Higher food prices cause social unrest among the population and are a source of serious concern for the authorities.
The increased tension in the economy is not only reflected in higher consumer prices, but also in a rise in export prices. Export prices in China saw a reversal over the past eighteen months. While still falling in the first months of 2010 export prices, they turned upward in May 2010 (chart 2). In the first two months of this year, export prices rose by over 7%. This is the sharpest increase since 2005, the first year for which China published export and import prices. The higher commodities and labour prices are now feeding through to export prices.
Higher export prices from China pushing up inflation in euro area
Exports from China to Europe consist mainly of industrial products, including ICT hardware, electrical products and clothing. In 2010, the euro area imported around EUR 209 billion in goods from China, equivalent to more than 13% of goods imports. The Netherlands imported EUR 31 billion from China in that year, just over 9% of total Dutch goods imports.
In 2009 and in early 2010, the decline in Chinese export prices still had a tempering effect on price developments in the euro area. The current surge in Chinese export prices will, possibly with some lag, drive up inflation in the euro area. If the increase in Chinese export prices continues, the time of cheap Chinese products will come to an end. This will contribute to higher global inflation. As around half of the Chinese products imported into the Netherlands are destined for foreign markets, higher Chinese import prices will be only partly reflected in Dutch inflation.
Effect on balance of payments uncertain
Last year China ran a current account surplus of over 5% of GDP. Higher export prices automatically augment exporters’ revenues. On the other hand, exporters, perhaps after some time, may lose market share to competitors so that their export volume will expand less rapidly. It is impossible to say in advance which of these opposing effects will predominate. Moreover, a fall-off in export volume results in lower imports. It is hence uncertain whether the higher export prices from China will widen or narrow the current account surplus.