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China faces rude awakening about inflation

By Deng Yuwen (China Youth Daily)

17:04, September 01, 2011

Edited and Translated by People's Daily Online

Because the overall level of prices remains high, the National Development and Reform Commission's Department of National Economy admitted that it is unlikely China will meet the full-year inflation target for the first time, according to an analysis recently published on the commission's website.

China set a full-year inflation target of below 4 percent in early 2011, but its inflation rate has been higher than 4 percent since the beginning of the year. The rate reached 5.9 percent in May, 6.4 percent in June, and hit a new high of 6.5 percent in July.

Many institutions predicted that the inflation rate may drop to between 6 percent and 6.2 percent in August due to the weakening of the carryover effect, but a rate above 6 percent is still within the range of high inflation. The inflation rate may gradually decrease during the remaining four months of the year but is unlikely to fall below 4 percent or even 5 percent. It is almost certain that China's inflation rate in 2011 will exceed 4 percent.

What is worse, high inflation pressure may last several more years because the overall price level in the country is expected to stay relatively high during the entire 12th Five-Year Plan period. According to the report released by the Department of National Economy, the loose global liquidity condition is unlikely to change in the short term, and the global commodity prices are still high, so the imported inflationary pressure has not eased. The increase in resources prices and other input costs for enterprises as well as the impact of natural disasters could also push up consumer prices.

Of the trends mentioned by the National Development and Reform Commission, some are short-term factors and some others are mid- and long-term factors. Among the factors affecting future inflation, the short-term factors can be ignored, while the mid- and long-term factors should be emphasized. However, the future outlook on inflation is simply pessimistic, given the mid- and long-term factors.

First, the world economy, particularly the economies of several major advanced countries, will likely remain weak over the next several years amid the impact of the U.S. and European debt crises. Therefore, they must continue to increase the liquidity to stimulate their economies and maintain a relaxed monetary policy for a rather long period of time.

For instance, the U.S. Federal Reserve will very likely to implement the third round of quantitative easing measures. Where will the excess liquidity flow? The commodity market will inevitably become the ultimate destination of the liquidity, so that it is extremely difficult to keep prices from rising.

Second, China's labor costs will continue to rise due to the gradual disappearance of the demographic dividend. The rising labor costs will set off a chain reaction of increases in the prices of products and services.

Third, the prices of resources and raw materials will also continue their rising trend. Natural resources such as coal, oil, gas and water are essential to industrial production and people’s lives. Due to their practical value and scarcity as well as the ever-increasing requirements for environmental protection, the prices of natural resources are bound to rise, which will inevitably lead to increases in the prices of raw materials.

In addition, the successive foreign trade surpluses of the past years have led to an extremely large amount of foreign reserves, the loan increment will still be large due to the large financial and infrastructure construction investments, and the elements that lead to the inflation, such as the reoccurring diseases of the currency area, will not be fundamentally changed in the next several years. Therefore, with all the factors above affecting and interacting with each other, it can be concluded that the low price situation of the past will hardly reappear in the next several years.

The high commodity price and inflation will certainly negatively affect the daily life of common people, especially the life of low-income people. Therefore, the governments need to take all the possible measures to reduce the price on the one hand and properly raise the minimum wage standard, retirement pension standard and basic living allowances standard on the other hand. They should also strengthen the public services so that low-income people's quality of life will not be lowered by the inflation. However, it must be remembered that the trend of inflation will not be changed even if the governmental work achieves good results. Therefore, common people still need to be mentally prepared for the coming high-price era.

In fact, the price fluctuation that is worse than the current one has occurred at least five times in China in the history since the reform and opening-up started. In the beginning of 1990s, the price once rose by as much as 20 percent. We think it is hard to accept the current one, because we are enjoying less social welfare currently than in the last century on the one hand and we have been used to the situation of high economic growth and low inflation in the past over 10 years on the other hand. However, as a developing country, China is theoretically able to tolerate an economic growth rate of 9 percent with an inflation level between 5 percent and 6 percent.

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Canada at 2011-09-0270.36.49.*
Canada is subsidizing oil exports to the U.S. as the price differential between WTI & Brent crude is ranging from $20.00-$25.00. China has to pay much higher prices for oil imports than Americans do.
Guess What at 2011-09-0166.58.203.*
Welcome to the 21st Century and Capitalism. You can"t push the river.... it will always find a way.
  

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