Food prices are on the rise in China and analysts from all over the world are keeping a close eye on the situation. Inflationary changes in China do not just affect the people of Shanghai and Beijing – the whole world feels their ramifications, writes Sam Webb.

For those of you who have been living under a rock on the moon with your fingers in your ears for the past 40 years, the 'economic miracle' that China has undergone since the economic reforms instituted by Deng Xiaoping in the late 70s has not only transformed the country but forever altered the global economy.

In terms of the food sector, investment from multinationals has flooded in and at the same time food exports have come gushing out.

But, this week, the spectre of rising inflation, often a concern in China's fast-growing economy, returned. It was reported that consumer prices in China rose 6.5% in July, compared with the same month last year. 

The factors behind rising prices are myriad: the increased price of grains and edible oils, a drought in the north of the country at the beginning of the year, greater labour rights and increased urbanisation, which has caused a massive influx of rural labour to cities and loss of agricultural land.

Taiwan-based Want Want Holdings, a major food manufacturer in China, says it is being forced to raise prices because it faces "tremendous pressure" from surging raw material costs for goods like sugar and plastic packaging.

Rival instant noodle maker Tingyi also reported high material prices had affected its business in the first half of 2011. However, Tingyi said it had suspended plans to increase prices to support China's "national policy of price stability".

Torsten Stocker, partner at management consulting firm Monitor Group's Shanghai office, says food manufacturers, under government pressure to keep prices low, will grumble but will likely hold off on price rises.

"There are a mix of activities they can pursue, such as reducing portion sizes, introducing more economical packaging and reformulating the product to, for example, use less sugar. They are used to dealing with it," he tells just-food.

Stocker insists China is still an attractive market for grocery manufacturers, as shown by major companies continuing to invest in the country.

Tesco is certainly not skittish. It has just raised CNY725m (US$113m) to fund its expansion in China through the launch of an offshore Chinese Renminbi denominated bond issue in Hong Kong.

And, last month, Nestle moved to buy a majority stake in major Chinese confectioner Hsu Fu Chi.

"Ultimately, demand for most products, including most food products, is still growing," Stocker says. "Commodity prices are already slowing down and the renminbi is slowly but steadily increasing, which should make imports cheaper."

Michael Hughes, a consumer packaged goods analyst for Datamonitor, believes food inflation is definitely a concern in China but agrees that companies are still confident about investment.

He says China's middle class is generally reluctant to reduce spending
on high-end premium goods but they are still value-focused and will look to save money in product categories where there is less emotional attachment - for example everyday food and drink.

Nevertheless, Hughes does note that inflation will result in rising export prices on foods exported from China. 

"This is something that will also have been influenced by changes to wage structures in the country and means that prices on food exports will increase. Given that research shows consumers in developed markets are not overly trusting of Chinese groceries (a situation exacerbated by recent food contamination scares), this is likely to have further impact on exports."

One reassuring sign is that some market experts believe inflation has peaked and will decline in the second half of 2011.

Zhang Liqun, a Chinese economist, last week that he expected the inflation pressure resulting from surging food prices to start easing as supply increases, thanks to a growing output of grain, rice and vegetables. When reading his assessment, however, it should perhaps be noted that he works for a government-run research centre.

So what can be done in the meantime? Chinese authorities have said that controlling price rises is their top priority but their options are limited.

China's central bank has raised interest rates five times since October 2010 in a bid to control prices, but authorities have to balance reining in prices with ensuring that tight monetary policies do not start to hurt growth.

It appears there are no simple answers to China's inflation woes. The country's decision makers will have to wait and see – and the world watches with them.