May 7, 2008

 

China's food inflation spills over to Hong Kong

 

 

Hong Kong's food prices rose 19.5 percent in the past one year, with most of the increase taking place in recent months, according to a USDA report released April 21.

 

Retail food prices between January and February 2008 alone rose 6.4 percent, accounting for one-third of the annual increase in the Consumer Price Index. Pork prices rose 56 percent  while beef prices rose 49 percent.

 

Unlike other countries in a similar situation, the Hong Kong government has not appeared to implement any programmes to encourage local food production or restrict exports, one reason being it has few land and farm resources of its own. Apart from securing verbal commitments from Thailand and Beijing to continue supplying rice, there has been no official response to the current food inflation, the report said.

 

Food inflation in Hong Kong has been led by steep increases in meat prices. The year-on-year change in pork price for February 2008 was 56 percent.

 

Hong Kong's inflation is also fuelled by a host of internal factors including strong domestic demand, a weakening currency that is tied to the US dollar and rising food prices in Mainland China, Hong Kong¡¯s largest supplier.

 

China accounts for about 21 percent of Hong Kong's food imports and has pledged full support for Hong Kong's food supplies.

 

However, there is no guarantee for food being offered at stable prices, the report said.

 

In fact, some of the price increase in Hong Kong was due to the 15 percent appreciation of the RMB over the past year, the report noted.

 

Hong Kong saw a rate of increase in food prices that mirrored that of China's. Apart from the 56-percent rise in pork prices, beef prices also rose 49 percent  while poultry rose 19.1 percent. Edible oils and  eggs also saw an increase of almost 20 percent.

 

Still, the impact on the average consumer is limited as Hong Kong is an affluent economy with an average of 10 percent of household expenditure spent on store-bought food and another 17 percent on eating out. Hong Kong does not receive any food aid.

 

As a response to high prices, some consumers are shifting their consumption from fresh to frozen meats.

 

Despite the high inflation rate, Hong Kong is expected to maintain its free trade policy.

 

As Thai rice prices increased significantly, Hong Kong traders began exploring opportunities to source from China. Higher pork prices in China has also prompted Hong Kong traders to increase purchases from other countries such as the US, Brazi, Spain and Germany.

 

As the Hong Kong currency is pegged to the U.S. Dollar, Hong Kong traders find it more price-attractive to source products from the US.

 

In 2007, US exports to Hong Kong increased 28 percent. Hong Kong, despite a small population of 7 million, is the eighth largest market for US consumer-ready products.

 

While officials expect acute food inflation to continue in 2008, local economists forecast that the odds of run-away inflation are low.