China introduces subsidies amid food shortages

Vegetable market in Beijing Some vegetable prices have risen by almost two-thirds so far this month

China's government has said it will provide poorer households with subsidies in response to double-digit food price inflation.

Inflation accelerated to 4.4% in October, with food prices rising 10.1%.

The government also said it had not ruled out price controls if current grain and vegetable shortages worsen.

Meanwhile the Shanghai stock exchange has fallen nearly 10% in four days on fears of more interest rate rises in response to the price rises.

The Shanghai composite index ended Wednesday down a further 1.9%, having fallen more than 4% on Friday and again on Tuesday.

Painful price rises

The People's Bank of China raised rates unexpectedly in October in response to growing inflation pressures, and has adopted a more hawkish tone since.

Consumer price inflation rose to 4.4% in October, which was up from 3.6% a month earlier and its highest level in two years.

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The average wholesale price of some vegetables in Chinese cities rose by nearly two-thirds in the first 10 days of this month, raising fears that food hoarding was exacerbating shortages.

It is also thought the government may be considering stiffer penalties for those caught hoarding food.

The latest move comes after premier Wen Jiabao said the government was "formulating measures to curb the overly fast rises of prices".

"Great attention should be paid to market supply and demand and prices because they are related to the public's basic interests," added Premier Wen in his statement.

The government also announced it would increase diesel supplies after industries reported fuel shortages.

Easy money

China's inflation problems - and the concomitant threat of civil unrest - also lie behind Beijing's recent criticism of the US Federal Reserve's resumption of quantitative easing (QE).

The Fed's new round of QE threatens to weaken the dollar, making Chinese imports less competitive in the US.

But in order to maintain a competitive exchange rate with the dollar, the People's Bank of China would have to intervene to buy more dollars and sell more yuan.

However, by selling more yuan, China risks further fuelling inflation, as well as what some see as asset bubbles in property and stocks.

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