AFTER years of filling Australian shops with cheap products, China's latest export is inflation, with the price of goods set to rise over the next six months, economists say.
Soaring energy prices, higher labour and raw materials costs, and new environmental and tax rules are forcing Chinese manufacturers to increase the price of their exports, which, in turn, is being passed on to consumers.
"It's simply demand and supply," said Richard Evans, the head of the Australian Retailers Association.
US consumers are already feeling the pinch as prices from everything from clothing to toys soar ¡ª some by as much as 50% ¡ª and economists warn that over the next six months Australian shoppers will also start to feel the impact of higher Chinese prices.
It couldn't come at a worse time for the Australian economy. With interest rates at an 11-year high and inflation well above the RBA's comfort range, the Rudd Government has confirmed it will go ahead with tax cuts totalling $57 billion over the next year.
"The politicians won't admit it, but this will be inflationary," said ANZ's chief economist Saul Eslake.
In the longer term, higher costs in China could spell the end of the era of the ultra-cheap goods ¡ª which had helped keep Australian inflation relatively low despite 16 years of strong economic growth ¡ª as Beijing attempts to move up the manufacturing ladder to higher value-adding products.
"China has been the world's factory and the anchor of the global disconnect between rising material prices and lower consumer prices," Credit Suisse economist Dong Tao told The Washington Post this month. "But its heyday is over. We're going to see higher prices."
Although Chinese economic data is notoriously rubbery, inflation figures to be released this week are expected to show that prices are rising at a staggering 6%, up from 5.6% in the three months to December.
The saying was once "when America sneezes, the world catches a cold", but now it appears China could be the source of the bug.
US-based economists, where inflation is already running at 4.1%, are expecting Chinese prices to jump about 10%, exacerbated by the falling value of the greenback.
Once again, the strong Australian dollar had helped to offset the worst of the world's ravages, but economists and retailers warn that there will be some pain.
"Over the next six months or so there is a risk that Chinese export prices will rise and that will add to inflation in Australia," said AMP Capital's chief economist Shane Oliver.
Mr Eslake said it made sense that the high commodity prices Australia charged manufacturing nations such as China would eventually be passed back to global consumers.
"If you look at producer prices or export prices there clearly has been acceleration in the inflation rate in China," he said. "Something that could contribute to higher inflation in Australia would be rising prices for Chinese goods."
Prices for hard commodities such as coal and iron ore are expected to jump by as much as 80% this year, while other metals such as copper and zinc remain at near record highs. Even the cost of plastic has jumped 30% in recent years due to higher oil prices ¡ª all of which adds to the cost of Chinese goods.
The need to feed China's burgeoning city-based middle class has also been a major factor behind soaring world food prices ¡ª Australian food prices jumped by nearly 12% between September 2005 and last year. This has led to workers demanding higher wages.
Despite China appearing to have an almost inexhaustible supply of labour, wages have risen almost 80% in recent years as about 10 million people move into urban areas every year.
The extent to which Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass on much of the higher costs to consumers remains unclear, analysts say.
But Chinese companies are already reeling from mounting cost pressures that they say will weaken profit and could disrupt supply chains, particularly after the massive recalls of potentially dangerous toys last year.
"This is what I call the perfect storm," Alan G. Hassenfield, chairman of Hasbro, one of the world's largest toy makers, was quoted saying. "We've got higher labour costs and labour shortages, plastic prices have gone way up and we're doing more safety tests."
Mr Eslake said the desire of Beijing to protect "Brand China" following the recall of toys tainted with lead paint and substandard food exports to much of Asia, had led to the enactment of more stringent regulations, which is also adding to manufacturing costs.
"The view among officials is that Chinese manufacturers have been cutting corners in order to meet Western expectation of lower prices and their message is 'don't do that'," Mr Eslake said.
Indeed, some toy factories have since gone broke, caught between rising local costs and demands from foreign customers to make better products at even lower prices.
Other government policies are also coming into play. China, along with India, is one of the few developing countries that rejected the IMF/World Bank doctrine that establishing a manufacturing base is counter-productive and that they, like African nations, should simply sell raw materials to developed nations.
Unlike African nations, China can now boast economic growth of around 9% and, as the world's eyes turn to Beijing in the lead-up to this year's Olympics, Chinese authorities are attempting a double act.
After years of complaints from Europe and the US about the country's growing trade surplus, China has removed some incentives for cheap export goods.
In June, China removed or reduced tax rebates on hundreds of exported items, including toys, apparel, leather, wood and other goods, effectively taxing those industries, Mr Eslake said.
The other aspect of the scrapping of tax rebates is Beijing's attempt to force manufacturers to move up the ladder to produce items such as cars.
This might be the silver lining to the inflation cloud, argued Dr Oliver. He reckons that within a year or two, when China starts to produce more than just children's toys, the country's new exports could have a price dampening effect on everything from plasma screen televisions to vehicles.
After all, says Dr Oliver, Chinese workers' wages are still only about 5% of Australian wages, giving them a large cost advantage.
Inside the giant ¡öChina is Australia's largest trading partner.
¡öChina's current-account surplus rose by 10% of GDP last year, meaning it produced and exported more than it consumed.
¡öChina's economic growth has begun to inch down from its record rates earlier in 2007, while food prices are lifting inflation.
¡öThe World Bank says macro-economic policy needs to address the challenges of inflation and persistent external surpluses.
¡öThe Chinese Government recently introduced further administrative measures to contain inflation.
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