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Inflation and Shanghai’s Trucker Strike

April 24, 2011

The news near the end of this week was dominated by a truckers’ strike that broke out at the Port of Shanghai, the world’s busiest container port.  The stoppage, which began Wednesday, was sparked by the Chinese government’s decision to raise fuel prices, as well as earlier increases in fees the drivers thought were unfair.  On Friday, the protests showed signs of boiling over into violence, with rumors spreading of a tough police crackdown.

The Wall Street Journal asked me about the relationship between the strike and inflation in China, which rose to 5.4% in March:

“It’s a sign of rising tensions and people are finding it more difficult to make ends meet,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. He said the government’s recent decision to raise state-set fuel prices at a time when food and housing prices are already climbing was partially driving the truckers’ concerns. “If you do that in an environment where people are already stressed out about rising prices then it can create a very volatile situation.”

Canada’s Globe and Mail asked me the same question, as well as whether the strike could spill over into broader unrest:

“There is a strong feeling that the cost of living is rising and it’s cutting into people’s real gains from a growing economy,” said Patrick Chovanec, a professor at Tsinghua University in Beijing.

“It’s of great concern if it becomes part of a trend. There are localized protests nearly every day about all kinds of issues, but this is one where the pressures are likely to grow in intensity in the days ahead, and everyone – including the Chinese government – will be watching to see how people respond and whether frustration boils over,” Mr. Chovanec said.

My comments are fine as they stand, but I feel I should offer a little more context for those who are following the situation in China more closely.

The standard measure of inflation, the Consumer Price Index (CPI), includes both food and fuel in the “shopping basket” of prices it measures.  Food, however, is often subject to “price shocks” — sudden spikes in prices — because of temporary shortages due to weather or similar supply disruptions.  Oil, which most industrialized countries are required to import, is even more subject to volatile price fluctuations due to war, unrest, environmental disasters, or any other number of other causes that are completely external to the management of the domestic economy.  As a result, many economists argue that it is better to look at “core CPI” — CPI minus the food and fuel component — for a better measure of the underlying inflationary pressure in an economy.  I would argue that food, and possibly fuel, should not always be discounted quite so easily, especially if inflationary demand is pushing up prices broadly — as I think is happening in China today.  However, it’s important to note that recent spikes in oil prices, due to the unrest in Libya and other Arab states, is distinct from China’s homegrown inflation problem and is something beyond Chinese policymakers’ immediate control (although it’s equally fair to note that the broader pressure behind rising oil prices more generally is being driven, in large part, by the growing appetite of China and other rapidly emerging markets for oil imports — a demand which may be inflated by China’s expansive monetary policy).

It’s also important to realize that in China, fuel prices at the pump, for both gasoline and diesel, are set by the government — specifically, the National Development and Reform Commission (NDRC) — not the market.  That’s actually not that unusual for developing countries, which frequently set fuel (and food) prices artificially low to make it more affordable for lower-income people.  The problem, of course, is that when oil prices spike, and those cost increases aren’t reflected at the pump, somebody needs to cover the difference.  Back before the global financial crisis, when oil prices were reaching $160/barrel, the Chinese government originally tried to force its state-owned oil companies, which import and refine over half of China’s petroleum supplies, to operate and sell fuel at a loss.  The losses were pretty staggering, and soon the oil companies were dragging their heels, shutting down refineries for “temporary maintenance” to stem the bleeding and creating fuel shortages.  Eventually, the NDRC agreed to directly subsidize the oil companies.  When oil prices dropped, the immediate crisis passed, but the episode appeared to convince the NDRC that, in the future, it needed a more flexible pricing framework for passing along higher oil prices to consumers (I actually did a show on this topic on Chinese TV back in May 2009, which you can watch here).

So in many ways, the Chinese government raising fuel prices to reflect the rising global price for oil is a good thing — but it’s also a painful thing for Chinese consumers who, unlike American drivers, aren’t used to seeing fuel prices rise and fall with the market.  Chinese drivers — including the truck drivers in Shanghai, as well as taxi drivers across the country — have been insulated from such forces, and being exposed to them — which is healthy for the economy as a whole — comes as a rude awakening.

The point, though, is that this “rude awakening” comes at a time when the typical Chinese citizen is feeling pressure to make ends meet from rising prices across the board, due to an over-expansive monetary policy.  The real problem with inflation isn’t that price rise — if all prices rose the same amount simultaneously, and the value of all obligations were adjusted accordingly, inflation would have no real effect on anyone.  You’d just a few zeros to every number and life would go on like before.  The problem is that prices rise unevenly.  Some people get to charge more while paying less.  Other people get squeezed — they have to pay more but are unable to pass those costs along.  Government-imposed price controls, which are supposed to help, sometimes make things worse by interfering with the ability of market participants to adjust prices to accommodate their costs. 

When profit margins get squeezed — either due to price controls or just the uneven adjustment path of inflation — and companies can’t pass higher costs along to consumers, they start looking for ways to push costs down onto suppliers — particularly more vulnerable ones, like truckers.  I suspect, but can’t prove, that’s probably part of what we’re seeing.  Besides complaining about the fuel price hike, truckers have been complaining about new fees that have been imposed on them (to cover the port’s and logistic operators’ higher costs, no doubt) as well as the fact that their wages haven’t kept pace with the rising cost of living.

It sounds, to me, like a classic inflationary squeeze — and we’re likely to see more of it, in other sectors, as the Chinese economy struggles to adjust to the flood of money that’s been unleashed over the last couple of years. 

By the way, on Friday, the Blue Ocean Network (BON-TV) aired an episode of Chinalogue, their current affairs show, featuring a more general discussion of Chinese inflation, its causes, and its consequences, between me and Professor Huo Deming of Peking University.  You can watch the program here.

4 Comments leave one →
  1. April 25, 2011 10:40 am

    Patrick,

    thanks for the post. I wonder if you could comment on the likely effects of consumer price inflation on wages growth, and whether a wages explosion is really going to push China into being uncompetitive relative to other more developed economies. I have seen some commentators talking as if the China low-cost era is over, with calls for US and other manufacturers to start re-tooling and re-training.

  2. deetee permalink
    April 26, 2011 3:25 am

    Professor,

    How far and wide this thing can spill over to other sectors?
    please speculate, thanks.

  3. Hua Qiao permalink
    April 26, 2011 2:17 pm

    One fascinating bit of news recently is that Northern China actually has a glut of cabbage right now due to unseasonably warm weather in April. However, prices at stores remain at 3RMB per jin (1/2 kilo) while the price to the grower is about .2 RMB. This points up a problem that I think is going to be a huge impediment to China transforming itself to a consumer society. The wholesal/retail distribution system in China is quite dysfunctional and rife with corrupt skimming at various levels as well simple bureaucratic nonsense.

    South China Morning Post has run some articles on this vegetable story. Some growers are plowing under their crops because they can’t cover harvesting costs.

    Patrick mentioned the challenge of transitioning to a consumer oriented economy in a post many months ago. I think this is a manifestation of that issue.

    • deetee permalink
      April 28, 2011 12:53 am

      In U.S people eat meats from frozen stock, vegetables
      as well–albeit refrigerated, but that is not the case in
      Chinese world, i.e. China, Hongkong and Taiwan.

      All the foods served on the table are all fresh; pig,
      cow, lamb are all freshly slaughtered early in the
      morning, fishes freshly caught during the night,
      same as vegetables, freshly delivered, all of these
      converge and distribute into local wet market
      before it opens.
      Frozen kind are designated to supermarket prepared
      food, which sells in package. Unless it is absolutely
      necessary, consumer rarely chooses this kind of
      food.
      I guess that put quite a strain on food production
      planning and distribution, thus price fluctuation
      becomes quite natural from time to time.

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