INFLATION AND CHINA’S STRATEGY

THE DEBATE TO CHART CHINA’S ECONOMIC STRATEGY

Jayadeva Ranade

Daily News and Analysis, September 5, 2011

The recent downgrading of the US credit rating was received with shock in numerous capitals including Beijing. Amidst reports of a likely global economic downturn, China’s leadership is additionally confronted with growing inflation and rising food prices. Inflation accelerated last month to its fastest pace in three years, with consumer prices rising by 6.5%. Rising food prices were a prime contributor, adding to the leadership’s concern.

There is speculation in Beijing that, prompted by these concerns, China’s top leadership revived a practice suspended since 2003 and met over one and half months this June at the northern seaside resort of Beidaihe. The economy and economic strategy were at the top of their agenda.

China’s leadership is very sensitive to any threat to ‘social stability’. Premier Wen Jiabao bluntly warned in March this year that rising prices, gap between the rich and poor, and corruption could ‘even hit the government’s control of power.’ While it is felt that an annual GDP growth of 7% would generate adequate employment, rising food prices are a more immediate worry. The effort is to keep the Consumer Price Index (CPI) under 4%.

Recent official Chinese reports reveal an increase in prices of consumer items. The price of eggs rose by 16.1% over last year while edible oil prices had risen by 21% in 50 cities across China. Ministry of Commerce data revealed a 38% increase in pork prices from the beginning of the year in 36 major Chinese cities. Chinese authorities were compelled to release stocks from 2,00,000 tons of State-held reserves of frozen pork into markets in eleven provinces. The price rise had another deleterious effect. Farmers producing grain are reluctant to sell crops at current prices and grain buyers report that purchases dropped by 90% this year. The drought of past months has adversely affected rice and cereal crops, compounding problems. Intervening to curb the trend, the People’s Bank of China informed banks that it will begin applying reserve requirements to some of the money that has been channeled into off-balance sheet lending.

The economic situation has, however, sparked a larger debate inside China, including advocating internationalisation or rapid appreciation of the Renminbi (RMB) though that could mean seriously slowing down GDP growth. Late this August, former Director General of the prestigious Institute of World Economics and Politics of the Chinese Academy of Social Sciences, Yu Yongding, criticised China’s large scale purchases of US Treasury Bills.

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