The End of an Era? Inflation Returns to China

IMGXYZ800IMGZYXThe China Program at Carnegie Endowment hosted a seminar on October 25, 2007, where senior associate Albert Keidel discussed his latest policy brief "China's Looming Crisis-Inflation Returns."  Nick Lardy from the Peterson Institute offered his own critique about the report, while Pieter Bottelier of Johns Hopkins University School of International Studies moderated the event.

Keidel's policy brief focuses on the risk of inflation crisis in China.  According to the statistics provided by the report, Consumer Price Index in China has surged in the past few months especially in the food sector, and risk of social unrest appears likely if the Chinese government does not take preemptive steps to cool down the overheating economy.  Keidel emphasized the devastating consequence of mismanaged inflation by connecting China’s last major inflation crisis, which took place in 1988, with the massive public demonstration at Tianamen Square in 1989 that led to the bloody crackdown.  In order to remedy the situation, Keidel recommended the Chinese authority to take the following measures; first, the government should increase imports of fine grains from the U.S, because grain shortage is the primary factor behind the surging food price.  Secondly, deposit rate in Chinese banks must be raised above inflation rate.  Contrasts to conventional wisdom, China’s double-digit economy growth in recent years is driven by domestic demand rather than export.  Therefore an increase in returns from the bank could prepare the general public to match the current inflation.  Finally, U.S policymakers should re-assess the source of economic growth in China so that more effective policies can be formulated to improve economic relation between the two governments.

Nick Lardy started his comment by questioning the report’s claim on the origin of current inflation in China.  He argued that in retrospect China’s inflation has primary been driven by sharply raising investments rather than shortage of crops.  The report fails to realize that additional factors such as bubbles in asset market have also been the major factors behind China’s inflation.  Finally, Policy recommendations from the report appears to be overwhelmingly focused on fixing inflation in the long run without offering rationales to address the problem in short-term.

Pieter Bottelier challenged the origin of China’s inflation crisis as well.  Similar to Lardy, he believed that the report has marginalized the influence of financial factors such as the excessive liquidity on fuelling the current inflation.