"The Peoples Daily" - Drought worsens fears of inflation

The Peoples Daily (PRC), May 31, 2011

http://english.peopledaily.com.cn/90001/90776/90882/7395635.html

A rare drought that has wreaked havoc in central and southern China is expected to send grain prices soaring as experts predict the worst disaster of its kind in 50 years could offset the government's efforts to curb inflation and threaten its annual CPI target of 4 percent.

Five provinces in the lower reaches of the Yangtze River – Hubei, Hunan, Jiangxi, Anhui and Jiangsu, a major grain-producing region – have suffered the most serious drought in decades.

The drought had affected 34.8 million people, over one million livestock, and 3.7 million hectares of farmland as of Friday, causing direct economic losses of 14.9 billion yuan ($2.3 billion), the Ministry of Civil Affairs said.

As farmers struggled to find new water sources for their crops, many fishing boats found themselves grounded as the river and lakes shrank, and residents in the region found the prices of vegetables, rice and aquatic products rising.

"Prices of some fruit and vegetables have increased to 6 yuan per kilogram on Tuesday from 3.6 yuan last week," Jin Zhengsheng, 50, a resident of Kunshan, Jiangsu Province, told the Global Times.

Huang Xianyin, 41, a villager from Xinjian county, Jiangxi Province, also noticed the hikes.

"It's not only vegetables. Rice has also become more expensive recently," Huang said.

Of the seven major vegetables, the prices of Chinese cabbage, rape and celery increased by 11.9, 16.4 and 11.6 percent respectively over the first ten days in May, the National Bureau of Statistics (NBS) said last week.

Some experts say the price hikes will send up China's consumer price index (CPI).

"We're not sure whether the drought directly caused the price hikes, but it's certain that the drought will create expectations of food price hikes, which will then cause the CPI to rise," Zhao Xijun, a vice director of the School of Finance at the Renmin University of China, told the Global Times.

A report released on Monday by the Bank of Communications said that due to the impact of the drought, agricultural food prices have resumed their upward trend after a short period that saw a slight fall in May.

The food price hikes, in addition to the increase in electricity rates for industrial and commercial sectors in 15 provincial-level regions starting tomorrow, could result in the CPI growing between 5.3 and 5.7 percent in May, and reach a record high of 6 percent in June, Tang Jianwei, a senior economist with the bank told sina.com.

NBS data showed that the CPI was 5.3 percent in April, exceeding the government's target of 4 percent for 2011.

Shen Jianguang, chief economist with Mizuho Securities China, told the Guangzhou Daily that the average CPI this year will likely be close to or even exceed 5 percent, citing various factors including the impact of drought on the prices of agricultural products, salary increases, and the rise in electricity prices.

However, some experts downplayed the impact the drought would have on CPI.

"The drought won't have a big impact on grain supply despite the rising prices, as the nation's rice stocks are abundant," Li Guoxiang, with the Rural Development Institute of the Chinese Academy of Sciences, told the Global Times.

Other major grain-producing provinces, such as Henan, Shandong and Hebei, have not been affected, Li added.

To quench the thirst downriver, the Three Gorges Dam has increased its output, and large amounts of money have been allocated to dig wells and artificially induce rainfall, measures that have not yet had clear effects.

"The drought is the severest I've ever seen. A large amount of lake water is gone and parts of the lake have become grassland," said Huang, a villager who lived near Poyang Lake in northern Jiangxi Province.

According to the Office of State Flood Control and Drought Relief Headquarters, as of Sunday, a total of 6.96 million hectares, or one-eighth of the nation's farmland, had been hit by the drought.

Rainfall has dropped sharply this year in some regions, especially in the lower reaches of the Yangtze River, where floods used to come in April.

"We are expecting rainfall. If the rain season doesn't arrive by July, the ground water may dry up. There will be severe consequences," Huang said.