|
|
| Nation's Inflation due to Economic Structure |
|
| Sunday,August 17,2008 Posted: 14:42 BJT(0642 GMT) | | From: China Daily Article type:Reproduced |
Inflation is always and everywhere a monetary phenomenon, monetarists say. While this is being increasingly challenged, the saying to some extent holds true in China.
For the latest round of inflation, which started last year and rose to a 12-year high of 8.7 percent year-on-year in February, too much liquidity in the market was given as the fundamental reason. Of course, soaring international oil and other commodities prices, and "imported inflation", were also responsible.
What has spawned excess capital in the domestic market? Many would instantly say "hot money" or speculative capital, which has flooded into China to take advantage of the rising yuan. Economists, however, argue that the unbalanced structure of the Chinese economy may be the main reason.
The Chinese economy has relied heavily on exports and investment.
In the first half of this year, for example, China's fixed-asset investment totaled 6.8 trillion yuan, accounting for 52 percent of the gross domestic product for the same period. The general level of other world economies, whether developed or developing, range from 20 to 30 percent.
China used to feel proud of its role as the "world's factory", because it had become the No 1 supplier of manufacturing goods. Relentless exports and investment have bolstered the country's economic miracle - three decades of fast and sustained economic growth with an annual average rate of nearly 10 percent.
But it has found that being the "world's factory" has a price. While it has accumulated a colossal amount of trade surplus and foreign exchange reserves, trade frictions are on the rise and the influx of foreign capital has put increasing pressure for the yuan's appreciation. The rise in the value of the yuan in turn attracts more speculative capital into the country, thus triggering a vicious cycle.
The ceaseless inflow of foreign capital has forced the monetary authorities to continually unleash more money to sterilize the effect, thus leading to a liquidity boom, which has pushed up demand and intensified inflation.
"China's inflation, in essence, has much to do with its distorted economic structure," Gong Liutang, economist with Peking University, said.
China's consumption is picking up gradually. Retail sales surged by an impressive 23.3 percent year-on-year in July, the fastest in 12 years. But in terms of its proportion to overall GDP, the ratio is still low - about 38 percent, compared with more than 70 percent in many developed economies.
The weakness of the foreign demand-supported economic structure lies in the nation's vulnerability to cope with external shocks. Once foreign demand weakens, China's exports suffer, as is the case now, and its economy faces a significant slowdown. This affects employment and people's ability to fight inflation, Sun Lijian, economist with Fudan University, said.
A domestic demand-driven structure is more balanced and capable of coping with external shocks, Sun said.
Shifting to a new growth mode backed by strong domestic demand, therefore, bears new significance other than reducing trade frictions or saving energy and resources. It is closely related with the daily lives of the people.
To that end, China needs to improve its social security network, so that people can be more assured about their future and therefore become more active in spending.
Chinese people work hard, but most of them keep the bulk of their incomes for future exigencies, such as education, housing and health.
When it comes to consumption, a new development can also help explain this round of rising inflation. Economists have said the current inflation is due to a change in young people's consumption.
Many people born in the 1970s and 1980s, unlike their grandfathers, are borrowing from banks - through credit cards and mortgages - to buy what they would otherwise be financially unable to do so.
In 2003, Chinese banks issued 3 million credit cards. In 2007, the number soared to 43 million, according to a McKinsey report.
In the housing market, numerous people in their 20s and 30s own their houses, thanks to mortgage loans.
"They are spending their future (money)," Shen Liang, head of a major futures website, www.7hcn.com, said "Home buyers borrow money from banks to pay developers, who in turn deposit the money in banks; the banks then lend the money to others again," he said.
"Due to this 'multiplier effect', extra liquidity is created in the market."
|
|
Bilateral Visits