China Director Jennifer Richmond analyzes Beijing's increasing inflation concerns and possible repercussions for the government. Editor's Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. Recent figures show that China's inflation is not over 4%, and are at risk of overshooting 3% for the year - a figure that makes the Chinese government worried. Even more worrisome is most of this rise is attributed to food prices. The Chinese Communist Party worries that when bellies are empty people will be more likely to take their concerns to the streets. Food showed a 10.1% increase year-on-year in October and sources on the ground suggest it could actually be much higher. Furthermore, the CPI statistic measurement system is outdated with measurements set early in 1990, which do not reflect the reality of inflation. Some reports even suggest that the National Bureau of Statistics is manipulating the numbers to downplay the problem by changing the weights in its CPI calculations. Regardless, Beijing is very aware of the problem and will continue to keep inflation as a top priority. However, appreciating the RMB - an effective tool for combating inflation - will not happen quickly. Instead, Beijing will focus on tightening its monetary supply by reducing bank lending by raising reserve ratios and interest rates. But, taming food inflation will be tricky and the National Development and Reform Commission is introducing new price controls and punishments for hoarding and for mayors who are unable to contain rises, called the "mayor responsibility system". Inflation strikes fear in Beijing because it is an issue that can transcend boundaries and if protests and riots over inflation spread containing public sentiment will be difficult. Add to this the diesel shortages we've already seen this year and the growing potential for natural gas shortages this winter. Such unrest threatens the central government's economic legitimacy and their guarantee to safeguard the interests of the people.
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