Chinese inflation threatens to worsen Korea’s price woes

Korea is likely to suffer faster price gains in the second half of 2011 as China’s growing inflation is feared to spill over into the country, experts said Monday.

China’s consumer price index jumped 4.9 percent in January and February from a year earlier, respectively, after gaining 5.1 percent in November and 4.6 percent in December amid the country’s strong economic growth.

The quickening price growth in Korea’s biggest trading partner is widely feared to add steam to Korea’s already strong price increases, which have been triggered by global oil and commodity price rises, leading to what experts called “Chinaflation.”

Local consumer prices surged 4.5 percent in February from a year earlier after rising 4.1 percent the previous month, driven by oil and agricultural product prices.

China accounted for 16.9 percent of Korea’s total imports as of last year. Labor cost and consumer price gains in China may lead to higher import costs for Korea, which will result in upward inflationary pressures here, analysts noted.

“As China moves to allow wage hikes and the appreciation of the Chinese yuan gathers pace, China-triggered inflationary pressures will likely build up due to higher import prices in the second half of this year,” Hahm Joon-ho, a professor at Seoul’s Yonsei University, said in a local symposium on March 10.

China’s shift in its economic policy to focusing on increasing domestic demand instead of export growth may lead to labor cost hikes, which will add to consumer price growth there, experts noted.

“Given China’s ongoing hikes in labor cost per unit, China could become the epicenter of inflation rather than take on its previous role as the safety valve of the global economy,” Lim Ji-won of JP Morgan said.

But other experts disagreed about the growing Chinaflation pressures, citing unlikely sharp surges in the Chinese yuan.

“The bilateral foreign exchange rate is a more important factor behind import price moves than growth in China’s local consumer price gains,” Ji Man-won, a professor at Busan-based Dong-A University, said.

“The Chinese currency is expected to show only small steady gains and its impact will be smaller than many predict.” 

(Yonhap News)