Such an inflation rate, Yao said, would be below the average annual CPI gain of 5.6% during the last 30 years. He added that inflation of 3% to 5% was normal for China, and largely insignificant so long as the overall economy continued to expand by around 10% a year.
Still, Yao’s comments seemed to indicate China’s outlook was similar to those of other BRIC economies — which include Brazil, Russia and India — as they too face headwinds from higher inflation and easing growth rates in the years ahead.
Meanwhile, the World Bank said China’s worsening inflation problem was the result of its own expansionary monetary and fiscal policies — and that it shouldn’t seek blame foreign fund flows for rising prices.
China is near the point where higher interest rates generate benefits which outweigh the costs, the World Bank’s lead economist for China said in a report Thursday. One outcome of such a move would be to dampen soaring house prices, which would discourage speculative funds entering China in search of ways to leverage the asset-inflation story.
Back in double digits?
China’s economy likely grew by 10% in 2010, accelerating from 9.1% growth in 2009, the World Bank said, keeping forecasts it issued in November.
But it added that China’s growth will likely cool to 8.7% this year and 8.4% in 2012, as Beijing unwinds its fiscal stimulus, applies new measures to cool the housing market, and tightens liquidity in an attempt to cool down inflationary pressures.
Other Chinese data due out next Thursday will include quarterly figures for fixed-asset investment, industrial output, and retail sales.
The growth in the Chinese economy has grown the past decade; the problem that the government now face is the rise in inflation. The main factor that has led to inflation can be portrayed by the economic price theory of labour, where high labour prices reduces the demand, low labour prices increases demand. China has an almost unlimited supply of labour, land and capital, which, compared to other countries in the world, means more firms would rather set-up their industries in China for their low prices than in, eg. the USA where everything is much more expensive. When demand for labour increases, more people in China have work to do, this increases standards of living. People would begin to buy more; firms would raise prices of goods and services to increase total revenue, and therefore commodity prices would increase. This factor means CPI rises, and therefore inflation does too. The 3% - 5% inflation is quite normal for a developing country to have.
However, though inflation shows the growth in the Chinese economy, the dilemma Chinese government faces is also due to inflation. First is the inflation in prices of basic necessities such as housing and food, the other is the lack of wage growth, especially in primary sectors. CPI is rising to the extent of exceeding government targets of 3% and likely to resume expanding. Then wages are not improving due to last year's goal to keep their labour cheap so to ensure international industries remaining doing business in China. There is a great gap between the rich and the poor in China, with a Gini Coefficient of 0.42; many of the poor will not be able to support themselves if inflation continues. Government must try to find ways to restructure its income distribution system and tackle inflationary problems, balancing the economy of different regions in China.
Over the past two years, the Chinese government has significantly loosened monetary policy in order to keep GDP above 8%; and they had successfully kept it. However, due to excess-leakage, inflation had risen above expectations. Therefore, for year 2011, the government will be focusing on stabilizing monetary policies, lowering the use of fossil fuels (because oil prices will predicted to increase in following years). Through applying the monetary policy, the government must focus on three rates: interest rates, currency rates, and the reserve ratio. By increasing interest rates, the negative interest rate (where interest rates are lower than inflationary ratio) will be corrected; reserve ratio must be tightened to reduce money supplied in the economy. Lastly, currency rates must be kept stable. Despite pressures by the US to give rise to RenMenBi, China relents. By keeping currency rates stable, the government can reduce fluctuations in the economy, often caused by 'hot money' flowing in and out from investors, as this will cause cost-push inflation.
The neo-classicists' view of the long-run aggregate supply curve can, in some ways, be used to describe the situation in China. Monetarists believe that long-run aggregate supply is not affected by the aggregate demand; to boost the economy, we shift long-run aggregate supply to the right. Different commodities have different situations. Fossil fuels, for example, cannot be applied to the monetarists theory as supply of such fuels will eventually diminish. However, if we are focusing on the production of many agricultural products, such as wheat or corn, producers can always find ways to match supply to the demand. Therefore, unlike the Keynesians' viewpoint, supply does not have a limit to its quantity produced.
In China, fiscal policies are adapted through direct government interference. One of the most prominent examples is the subsidizing of agricultural developments. They provide equipment and funding to farmers so they could maximize production of primary factors such as food, and cotton. Manufacturers can then find ways to maximize output to meet demands. When food prices are stabilized, CPI will also be stabilized, thus inflation will be eased, the economy will be cool; this will prevent acid bubbles this year.
In any case, though China's economy is growing at rapid speed, inflation is a factor that the Chinese government can no doubt tackle. The country itself is regulated by very traditional ways: regulations can always be applied on certain industries without the fear of rebellion or trade unions.