The grain supply shortage means that there is still room for price increases, said Zhang Xueying, a senior economist with the State Information Center.

Zhang said it was almost certain that grain production would slump in the summer.

The government hopes the price increase will help lift rural incomes, meaning it will not use its massive grain reserves to influence the rate.

China's grain prices started to increase in October last year, and the impact of this rise is now being felt in consumers' pockets.

The price of a 10-kilogram bag of rice increased from 32 yuan (US$3.86) to 40 yuan (US$4.80) within one week at a local Haode convenience store in Shanghai.

The rice price hike is also being seen at a private rice store in the city's Pudong District.

"Most of the prices of rice products here have risen by an average of 0.4 yuan (5 US cents) per jin (500 grams)," said Li Xinwu, a store manager.

An official with Shanghai Nonggongshang Supermarket Co. Ltd., a major local rice supplier, said the current focus of the company's work is to ensure a sound supply.

The price hike is still within a reasonable range, the official said.

Chen Xiwen, deputy director of the Office of Central Financial Work Leading Group, said room for further and rational price increases remains.

Grain prices, rising between 10 and 20 percent last year, were still below the 1996 level.

The government should allow grain prices to return to their rational levels, he said.

Chen stressed that the price increase will not have a major negative impact on ordinary people, so long as the government gives proper support to low-income urban residents.

In fact, urbanites' per capita spending on grain, edible oil, meat and fresh vegetables dropped 131.2 yuan (US$15.8) in 2001 compared with 1996, he said.

"My family cares little about the price hike, because it's no big deal for us," said Lu Amei, a middle-aged Shanghai woman.

Qi Jingmei, a senior economist with the State Information Center, said the grain price in 2004 will be kept high.

"There is also room for the price to rise another 5 percent," she said.

Around 60 to 70 percent of farmers obtain their main income from planting crops, which means that the grain price rise is good news for them.

"If rural people's income increases considerably, rural consumption demand is likely to be stimulated too," she said.

Rural residents' slow income growth has long been a headache for the central government, because it has a great effect on the implementation on policies designed to stimulate demand, Qi said.

"If consumption in rural areas cannot be stimulated, domestic demand, a strong engine for economic growth, will not fully expand," she said.

Chinese farmers, which account for more than two-thirds of the country's total population, currently contribute to only one-third of total consumption.

"The slow income growth will hinder the overall economic development and even undermine social stability," she said.

Rural residents' per capita net income notched up 4.3 percent year-on-year to 2,622 yuan (US$315.9) last year, according to the National Bureau of Statistics.

The rise was much lower than the 9.3 percent increase in urban dwellers' income.

The rate was also much lower than the year's economic growth of 9.1 percent.

The government has already pledged to give strong support to grain production in major grain-producing areas to help raise the income of grain farmers, Qi said.

China is expected to produce 455 billion kilograms of grain this year, which will help narrow the demand and supply gap.

China's total grain production stood at 430 billion kilograms last year, while the demand was about 485 billion kilograms.

Zhang Liqun, a senior researcher at the State Council's Development Research Center, said China's grain supply base was relatively good.

Meanwhile, supply will grow rapidly due to booming demand, he said.

"The grain price will not rise for a long time or by a big margin," Zhang said.

(China Daily March 10, 2004)