Moderate first-quarter rise in inflation expected (2)

16:27, March 29, 2010      

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<b>Asset prices </b>

Chinese economist Fan Gang said during the recent China Development Forum that the major crises over the past three decades were not caused by inflation but property and asset bubbles. The reasons behind China's economic growth rate of more than 8 percent in 2009 were not limited to the macroeconomic policies adopted by the government. They also include the macro-regulation measures China has continually taken over the past several years to curb bubbles and inflation. It is for this reason that China has not had large economic bubbles like other economies.

"If there are no large bubbles, there will not be a large crisis afterwards, so it is relatively easier to take regulatory measures. Counter-cyclical policies should be adopted during the booming period in order not to allow bubbles to swell during the period," Fan said.

Fan added that starting in 2010, China's economy will once again enter a new booming period. Therefore, the challenges facing China are how to manage the prosperity, inflation rates, as well as housing and asset bubbles, which may be regarded as issues to some extent that arise during the booming period.

"I think that there is indeed the threat of inflation, but such a threat is unlikely to be very big in the near future. The more important matter for China is to pay attention to asset bubbles. Macro-regulation departments should not only pay attention to inflation, but they should also be aware of a wider range of issues, particularly the capital market and asset bubble management," Fan added.

Foreign economist at the forum also suggested paying attention to the changes in asset prices. Michael Spence, a professor at Stanford University and a Nobel laureate in Economics, said that it is difficult to determine asset bubbles, and sometimes it is also difficult to tackle them. He thought that everyone would agree that asset bubbles are often accompanied by relaxed credit policies and very high leverage ratios. Although people have not had a clear understanding of the definition of asset bubbles, to prevent history from repeating itself, central banks of each country cannot pay attention to only the inflation issue, but rather should spend more time on the issues of tackling asset bubbles and conducting regulatory interventions at an appropriate time.

Junichi Ujiie, Chairman of Nomura Holdings, said that Japan's past experience showed that when asset prices rose, economic activities were stimulated by credit expansion and it eventually led to inflation. Central banks therefore should pay attention to the changes in CPI and asset prices when they determine the monetary policy. In the late 1980s, when economic bubbles arose in Japan, the Japanese government was too late and took too few measures to tackle them. This caused stock and land prices to rise for over a half year and two years, respectively, after tight monetary policy was adopted. The rise in China's housing prices is currently accelerating and approaching alert levels. Moreover, with the economic recovery, China is facing increasingly heavy inflation pressures.

By People's Daily Online
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