Economist
Is inflation or deflation
a greater threat to the world economy? Should policymakers focus
more on structural adjustments or aggregate demand?
In
China, time to tighten
He
Fan our guest wrote on Jun 1st 2010, 17:20 GMTINVESTORS
In
the global market may begin to worry about deflation, but in China,
inflation is still the major concern. There are clear signals of
overheating. The GDP growth rate climbed to 11.9% in Q1 2010. For a
country which has significant surplus labour, China is now facing
an acute labour shortage. Remember, the labour market for migrant
workers in China is the most “liberal” one in the world, and this
market is more reliable for diagnosing the macroeconomic situation
than official statistics. The
root reason for the inflationary pressure is ultra-loose monetary
policy. China launched a massive stimulus package to spur the
domestic economy in late 2008, but the lion's of share of these
public investment projects have been fueled by bank loans. Money
flows into infrastructure projects, and also the property market.
In the first month of this year, housing prices in Beijing
increased by 20%. Faced with mounting public pressure, the
government took all kinds of measures to stop the further increase
of housing prices. It has had some temporary success. But guess
what: the price for garlic and mung beans started to soar.
Recently, the stock market tumbled, out of fear of a more stringent
policy adjustment. But investors will soon realise that they have
overeacted, and there is no other place to put their money. Then,
all the money will flow back, and a stock market bubble may follow
the housing bubble. The
best choice is further tightening of monetary policy, say, an
increase in the interest rate of 27 basis points. The Chinese
government is hesitating, because they are concerned about the
turmoil in Europe. But if they wait too long, CPI may rise to above
4% in Q3, and by then, it will be too late, and too painful to turn
around.
http://www.economist.com/economics/by-invitation/guest-contributions/china_time_tighten
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