Economist: Tightening policies no cure for China's inflation

11:07, January 17, 2011      

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Tight macroeconomic policies would not be effective in fighting the cost-push inflation that challenges China, warned Li Yining, a leading Chinese economist with Peking University.

China's inflation rate jumped to 5.1 percent, a 28-month high, in November, according to the National Bureau of Statistics.

Tight policies will not work

Li noted that current inflation was the first "cost-push" inflation in China, and it emerged only in recent years. He cited shortages of raw materials and agricultural products, rising labor costs as well as soaring land and property prices as the causes.
"Tight policies won't solve these problems," Li said at the 2010-2011 Annual Meeting on China's Economy.

Previously, the central bank's moderately loose monetary policy and massive money supply were to blame for current inflation.

Wang Tongsan, director of the Chinese Academy of Social Sciences' Institute of Quantitative and Technical Economics, also denied the possibility of a short-term solution for cost-push inflation.

"The U.S. Fed's second round of quantitative easing will drive the advance of global commodity prices, which will influence China," he said.

In the second half of 2010, China raised the reserve requirement ratio for banks six times and lifted interest rates twice to curb inflation. The central bank last Friday added an additional 0.5 percent to the reserve requirement ratio, pushing it to the highest level ever.

Stagflation risks

Stagflation will be a concern in 2011, while the top concern in 2010 was the possibility of a double-dip recession, said He Keng, vice chairman of the Financial and Economic Committee of the National People's Congress.

Li said cost-push inflation was a major factor behind stagflation.

"Excessive infrastructure construction requires massive funds but will result in very low returns and lead to debt risks. Property bubbles in some cities will add to financial risks. Widening income gaps between urban and rural residents will drive more rural residents to the cities to seek employment opportunities and add to employment pressure," He Keng said, agreeing with Li about stagflation.

He suggested that China's macro control policies should emphasize the management of supply and implement structural tax cuts in order to support industries that can create lots of new jobs but have low profit margins. Meanwhile, the government should work hard to improve distribution structures, stabilize yuan exchange rates and impose property taxes as soon as possible.

By People's Daily Online


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