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Stagflation poses real threat to economic growth

By Yang Guoying (Global Times)

08:23, May 03, 2012

According to recent data from the National Bureau of Statistics (NBS), China's GDP grew at a rate of 8.1 percent during the first quarter of this year, the slowest pace in nearly three years. Although economic growth is slowing, many believe the country's economy is still on a stable course overall, as the rate of the economic expansion remains above the government's target of 7.5 percent growth set for the whole of this year.

I cannot, however, be so optimistic about China's economy and believe the government should take action now to prevent the onset of stagflation, that is, slow economic growth combined with rising inflation and mounting unemployment. Actually, the specter of stagflation is already beginning to rear its head in China, based on several recent economic indicators.

First of all, the erosion of profitability in the nation's largest enterprises points to a broad-based economic slowdown. The country's large industrial companies, or enterprises with annual revenues above 20 million yuan ($3.17 million), saw their profits slump 5.2 percent in the first two months of this year compared to the same period in 2011. Even centrally administrated State-owned enterprises saw their profits falter significantly over the first quarter this year, with their average profit margins lowered 13.6 percent compared to the same quarter in 2011, according to the State-owned Assets Supervision and Administration Commission.

Also, both the consumer price index (CPI) and unemployment figures have become grimmer in recent months. According to the NBS, the CPI gained 3.6 percent year-on-year in March, thanks in large part to spikes in pork and vegetable prices, which skyrocketed 11.3 percent and 20.5 percent respectively year-on-year during that month. As for unemployment, recruitment rates at companies in the manufacturing sector have been falling over the past two quarters due to sluggish demand both at home and overseas, according to Su Hainan, vice director of the China Association for Labor Studies.

In the past, China was able to cope with the pressures of stagflation through market reforms. For example, in 1998, the government abolished the welfare housing distribution system, making residential properties a tradable product in the market, to cope with CPI gains and faltering GDP growth caused by the Asian financial crisis in 1997. The subsequent boom in the real estate market spurred economic growth and eased inflation by absorbing surplus money from the market.

But after 20 years of economic reforms, the country has few new markets left to open, making this strategy no longer a viable option for dealing with stagflation. To help the country out of its increasingly dire situation, the government needs to direct more existing capital into the real economy, by, for example, lowering tax burdens on manufacturing companies to encourage investment in this sector.

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