Money supply may trigger inflation

08:05, October 19, 2010      

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China's mushrooming money supply might lead to serious inflation in the coming years, eroding consumer purchasing power even as the government tries to raise personal incomes as part of its 12th Five-Year Plan, experts said Monday.

The government plan, to raise personal incomes hand in hand with the country's gross domestic product (GDP), is designed to reduce income disparities and will be included in the five-year plan from 2011 to 2015, the Securities Daily cited Su Hainan, vice president of the China Labor Association, as saying.

However, even if personal income growth is directly linked to GDP growth, consumer purchasing power could still suffer over the next few years as the money supply expands.

If the money supply continues its 15 percent annual growth, the M2 will be 2.8 times China's GDP in 10 years time, which could lead to serious inflation problems, said Li Xunlei, chief economist with Guotai Junan Securities speaking at the China International Finance Forum Sunday.

China's money supply or M2 is the amount of money in the economy or simply put, the actual amount of bank notes and coins in circulation, plus money in checking and savings accounts. The nation's money supply increased by 434 percent over the past 10 years, which is extremely high compared with other major economies, according to central bank data. The M2 is also a major indicator of inflation.

China's M2 reached 69.64 trillion yuan ($10 trillion) at end of September, almost double last year's GDP.

In the US, the money supply is only about 80 percent of GDP, while in Japan and South Korea it is close to the level of those nations' GDP.

To date, inflation has not skyrocketed in China over the past decade because the booming property sector absorbed excess cash in the market, said Ding Jianping, a finance professor with Shanghai University of Finance and Economics.

However, with a host of government measures in place to calm housing prices and curb speculation, the snowballing money supply may have nowhere to go, possibly resulting in higher asset prices that will lead to rising inflation, Shanghai University's Ding said.

The dilemma for China, however, is that if it holds its money supply, other major economies including the US and Japan will keep their monetary policy loose by printing more bank notes. If Beijing doesn't follow suit, the yuan will appreciate significantly against other currencies, pushing up prices for Chinese goods overseas, which could in turn trim economic growth.

Unless the nation's GDP growth remains strong and more goods and services are produced, inflation is inevitable, Ding said.

By Wang Xinyuan

Source: Global Times

(Editor:祁澍文)

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