Inflation in China Could be Problematic, Economist Says (Video)

January 21, 2011 Updated: January 21, 2011
China’s Rising Prices Stoke Inflation Worries (NTD Television)

Food prices in China are shooting up. China’s National Bureau of Statistics published statistics on Jan. 4 showing that in 50 cities, 70 percent of food increased in price in December 2010. The study measured prices for 29 types of foods.

The same day, the latest statistics provided by the China Real Estate Information Group showed that pricing of new commercial buildings in Beijing, Shanghai, Guangzhou and Shenzhen had increased dramatically compared to the previous year. Out of the four cities, Guangzhou had the lowest increase at 23 percent, while Beijing had the highest, at 42 percent.

Economist Dr. Jian Tianlun said that all this shows that inflation in China is pretty serious. The Chinese Communist Party (CCP) could opt to increase the interest rate four to six times in 2011, but may still be unable to suppress it.

“The Central Bank increased the interest rate last Dec. 25, but in fact, it was too late. They should have done it earlier. The pressure from inflation is too great, forcing the CCP to increase the interest rate. If not accompanied with RMB appreciation, the potential for the interest rate increase suppressing inflation does not look optimistic,” he said. RMB is an abbreviation for China’s currency, the Renminbi (“People’s currency”).

Inflation Hard to Control

First, the CCP recently announced that its inflation rate increased from three percent in 2010 to four percent in 2011—that’s beyond the projected figure.

According to a recently published income report by a Chinese human resources firm, salaries in China’s went up by 8.4 percent in 2011, higher than last year’s 7.9 percent. That’s going to push prices up further.

Dr. Jian said that more than 80 percent of Chinese medicine increased in price. The level of increase was from five percent to 180 percent. This is unprecedented, he said, and shows that inflation is now hitting the critical area of medicine.

Dr. Jian also pointed out that gray income makes up a large percentage of China’s GDP. Dr. Wang Xiaolu, deputy director of China Reform Foundation National Economy Research Institute stated in a report he wrote last year that China’s gray income comprises 30 percent of China’s GDP and is unevenly distributed.

Upper class gray income is much more than that of the lower class, exacerbating the differences between the wealthy and the poor. People who have money continue to purchase houses, while people who don’t have much money can’t afford to buy them, which is a significant reason for the skyrocketing prices of housing.

Increasing Interest Won’t Do It

China should combine raising the interest rate with RMB appreciation to curb inflation, Jian said. Only if the two are done simultaneously can the economy be adjusted, something he says should have been done long ago.

On the other hand, putting up interest rates will slow down economic growth, so while the CCP says the interest rate will be set at between seven and eight percent, realistically, it’s more likely to be between eight to 8.5 percent, Jian says.

Social Unrest

If the interest rate is not increased, inflation will hit the double digits, and this could be problematic indeed.

With large scale price increases, factories and retailers will also bump up their prices—the service industry would then follow suit. If that happens, workers will demand increases in salary, which will further spike the cost of goods, creating another cycle of price hikes. A vicious cycle of inflationary pressures and expectations could form, Jian says.

If inflation becomes widely anticipated, and the CCP does not adjust the interest rate or the currency exchange rate, it is possible that people will take to the streets as they did in 1989, Jian says.

High inflation rates have frequently been a catalyst for social unrest in China, he said.

Read the original Chinese article.