The latest buzzword on the Chinese economy: Inflation

There were so many articles and posts last year about fears of China’s economy overheating. Then the issue died away, and for a few weeks some were painting a different scenario, one of deflation. Now things have come full circle, and there’s a whole new wave of article on how inflation threatens to rear its ugly head as China’s money supply grows.

It was the fourth consecutive week that the People’s Bank of China was unable to sell all its bills, indicating that investors expect inflation or interest rates – or both – to rise markedly.

Central bank governor Zhou Xiaochuan gave one of the grimmest assessments yet by a Chinese official of the risks that the economy might overheat.

“There are problems in economic activity, with investment demand expanding too fast, money and credit growing too quickly, and inflationary pressures rising,” he said in a statement in The Financial News, the bank’s newspaper.

China’s inflation is important to the US and Europe because it could start to affect prices in the US, especially as China bids up the price of oil and other commodities. And if the boom is followed by a bust, the result would very likely be an even greater wave of exports as China’s consumers lose their buying power.

Private economists differ on the likelihood that China will be able to brake its economy gently to a more sustainable pace. The question is whether China can avoid a recession that would cause a wave of corporate failures, non-performing bank loans and perhaps social unrest.

I won’t take sides or make predictions. I’ll only say that I hope the government acts responsibly to control this trend. The last thing it needs right now is a recession, which could bring China’s economic miracle to a grinding and painful halt.

The Discussion: 3 Comments

Unfortunately Richard it’s getting too late. The PRC needs to choose between slowing growth or an economic collapse. They have limited tools of control, both macro-economically (with fixed exchange rates) and micro-economically (for example the inability of the centre to control the regions).

The central Government is extremely worried but they are finding they are somewhat powerless to do anything about it.

April 14, 2004 @ 9:07 pm | Comment

Well then, is it time to give up the ghost and brace for the inevitable? That would be pure tragedy, spelling financial doom for Hong Kong, Taiwan, and most of the rest of Asia as well. I’ve been warning of it here for two years now, but it would be heartbreaking to see it actually happen. So many have assured me that the CCP is too smart, too in control to allow things to disintegrate. Let’s pray they’re right.

April 14, 2004 @ 9:11 pm | Comment

For whatever it’s worth, here is a link to a Barron’s article which appeared in February this year, and which I think is still one of the best articles around on the CCB’s problem.

Michael, from Kraut- and Weaselland

May 6, 2004 @ 4:10 am | Comment

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