Will China suffer from imported inflation?

11:12, November 12, 2009      

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When the shadow of the financial crisis still lingers on in the world, China's National Bureau of Statistics' recent statement that China will achieve its goal of 8 percent GDP growth for the whole year indicated its earlier recovery than other countries. Experts warned that early recovery may make China the first country to encounter inflation. In Fact, with dollar depreciation and rising commodity prices in the world market, there's now mounting imported inflation pressure on China.

"V-shaped" recovery

China's stimulus package has succeeded in stabilizing the economy. Yao Jingyuan, chief economist of the National Bureau of Statistics (NBS), said that China's economy was over the worst, saying November 2008 to February 2009 was the toughest period for the economy. With the positive signs for the EU and U.S. economies gradually confirmed, China's export will see growth again.

The Purchasing Managers' Index (PMI) of China's manufacturing sector rose to 55.2 percent in October. It was the eighth month in a row that the PMI reading stayed above 50, showing manufacturing recovery and rising entrepreneur confidence. China's export has been growing month on month since March 2009. Money supply also keeps expanding, with M1 (cash in circulation plus corporate current deposits) higher than M2 (board money supply) continuously in September and October, indicating the warm-up of China's economy.

Zhuang Jian, a senior economist with the Asian Development Bank, noted that China has in the past year expanded domestic demand with its 4-trillion yuan stimulus plan, support packages for 10 key industries and stimulus policies including "subsidized rural home appliance". China has not only won the rapid rebound of its domestic economy, but also driven global recovery.

Emerging pressure

Inflation, especially imported inflation, becomes another problem facing China. Countries around the world have injected huge liquidity into their markets.

U.S. monetary base, the stock of money in its banking system, doubled to 1.70 trillion U.S. dollars in August from 842 billion a year earlier. Central banks in Britain and Japan also implemented unprecedented loose monetary policies. In the first ten months, new Renminbi-dominated loans totaled 8.92 trillion yuan (1.31 trillion U.S. dollars) in China. Huge liquidity has generated increasing inflation expectations.

Driven by the depreciated dollar, rising commodity prices in the world market are adding the pressure of imported inflation to China. A report presented in October by Chinese Academy of Social Sciences (CASS) showed that oil prices have increased by 60 percent compared with the beginning of this year, and prices of nonferrous metal and iron ore have grown by around 40 percent. The pressure of imported inflation has increasingly direct influence on China's consumer prices.

The hike of commodity prices was the result of dollar depreciation. As Renminbi exchange rate to dollar remains stable, China will inevitably feel the pressure of imported inflation, explained Zhao Qingming, a senior researcher with China Construction Bank.

Li Taiyong, an analyst with GF Securities, said that inflation pressure would not be too big before the end of this year. He expected that there will be mild inflation in the first quarter of 2010. However, global inflation is inevitable if money supply in Western economies enters real economy from banking system. China will have to face imported inflation.

How to avoid?

Although experts generally agree that in the short-term China will face no real inflation, managing inflation expectations has been listed as one of the key points of China's macro-regulation for the rest of the year at a State Council executive meeting, which was chaired by Premier Wen Jiabao, on October 21.

Zhao said China should allow Renminbi to appreciate moderately to reduce the influence of the price hike of imported products.

Chen Bingcai, researcher with the China National School of Administration, said that China can reduce or cancel export tax rebate, increase workers' wages and keep nominal rate of exchange stable, in order to reduce influx of speculation capital.

Some experts suggested that the best way to avoid imported inflation is to purchase overseas resources. China should increase its gold reserves and buy oil and nonferrous metal. The most important way to tackle imported inflation and to maintain social stability, as they suggested, is to keep the consumption power of low-income people stable, as food prices may rise significantly in 2010.

By People's Daily Online
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