Thursday, March 28, 2013

What’s going Wrong with China?

Consumer Price Inflation in China has Skyrocketed from 1.5% in The Beginning of 2010 to about 5% at Present. And The Policymakers have been Helplessly reacting to it by Tightening The Monetary Policy, Aggressively. But is it The Right solution when it comes to Maintaining Growth?

While the Chinese economy continues to stun the world with its superlative growth figures at the forefront (in stark contrast to the troubled economies of the First World), there is an interesting happening in the background – the Chinese economy could well be overheating. No doubt, it’s difficult to tell when a rapid-growth economy like China’s starts overheating, but some of the risks associated with China’s $586 billion stimulus programme (announced on November 9, 2008) – inflationary pressures and asset bubbles specifically – are now certainly intensifying beyond the point of being ignored.

It’s not as if Chinese growth is slowing down. In fact, the dragon economy baffled expectations of mild cooling and reaccelerated in the last quarter of 2010 – Chin’a GDP growth accelerated to 9.8% y-o-y in Q4 2010, from 9.6% in Q3 2010, bringing the overall GDP growth for 2010 to 10.3%. While the industrial production rose by 15.7% in 2010, fixed asset investment also increased 24.5% during the year. Yes, that’s fast. Perhaps, too fast as all this clearly outpaced the government’s 8% GDP growth target for the year 2010 by a big margin.

Result: The overall rate of CPI inflation in China skyrocketed from 1.5% in the beginning of 2010 to about 5% at present. Chinese policymakers do argue that about half of this increase over the past year or so can be traced to sharp increases in food prices that reflect, at least in part, temporary supply shortages caused by adverse weather conditions; a closer look at the numbers shows that they might be right, at least partly.

Consumer prices excluding food were up 2.6% in January 2011, the fastest y-o-y inflation rate in at least 10 years. Although the rate of non-food price inflation moved back a bit to 2.3% in February 2011, it still remains high when compared to the average non-food price inflation over the last decade (see chart). In fact, a slight increase in food price inflation in the near future could prompt Chinese workers to demand even higher wages, thereby accelerating the non-food prices, and ultimately resulting in a higher overall CPI inflation. In short, there is a risk that an explosive wage-price spiral could hold the Chinese economy to easy ransom.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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