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Inflation expectations: coming reality or overanxiety?
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16:19, July 27, 2009

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The real estate market has shown clear signs of recovery in the middle of 2009. In June, housing prices increased year-on-year for the first time this year. The Shanghai Composite Index stood firmly above 3,000 points, up more than 80 percent over the stock market index in November last year. The substantial rise in asset prices has also led to the market's fear of possible inflation.

In the first half of 2009, the CPI fell 1.1 percent compared to the same period last year. In June, it dropped by 1.7 percent compared to the same period last year, hitting the lowest in 10 years. "At present prices are still low and the macro-economy is actually in a state of deflation," said Wang Qing, Morgan Stanley's Chief Economist for Greater China. He added, "Recently, however, what concerns the market is inflation. This indicates that expectations of inflation have formed, which are caused by a series of factors. However, there are only expectations of inflation, which are still far from reality."

A basic condition for inflation is a situation where total demand is greater than total supply. China, however, is still facing the structural problem of overcapacity. Business investments, especially private investments, have not really recovered. As a result, in the short term, it is difficult to change the situation of oversupply.

On the other hand, despite the recent rebound in the prices of crude oil, iron ore and other commodities internationally, the global economy is still at a low. Thus there will be no imported inflation in the short term.

There is also another critical factor for strong expectations of inflation, that is, the credit surge. In the first half, China's new loans of 7.36 trillion yuan greatly exceeded the planned 5 trillion in annual loans. At the end of June, broad money supply (M2) increased by 28.5 percent compared to the same period last year.

Director of Macroeconomics from China Academy of Social Sciences, Zhang Xiaojing believes that the credit surge has provided ample liquidity for the real estate and stock markets. However, at present, the real economy has not recovered and the monetary circulation is still slow. Thus there will be no overall inflation.

By People's Daily Online


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