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The following article was published in our article directory on October 29, 2010.
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Avoid Economic Hard Landing Need to Advance Anti-inflation

Article Category: Business Management

Author Name: xia zihui

At present, the decline of China's economic growth has given way to concerns about rising housing prices and inflation concerns. Therefore, the risk of a hard landing, not from the current policy of austerity, but rather the failure to effectively control the current inflation. In view of inflationary pressures will continue to strengthen, the policy aspect of the need to plan ahead, you can consider reducing the money supply growth, the magnitude of Super-down money. Also, should accelerate the expansion of the depth and breadth of financial markets to guide the rational distribution of the money stock.

After the surprise rate hike the central bank, the market started to worry policy tightening may be aggravated by the economic downturn and may even increase the risk of a hard landing. Such concerns, in fact, forget the first quarter of this year there had been local signs of overheating economy, the current macroeconomic policy mix is in response to signs of overheating and was introduced. Indeed, the slowdown in economic growth always accompanied by pain, but if the growth rate of 12% from highs close to 9%, the pain should not be too great, but can not, as of a hard landing.

The real risk of a hard landing, I think, is the runaway inflation after the policy side from severe contraction. 1988 "Price checkpoints" launched, long-term suppression of rapid dominance inflationary pressures, leading to CPI soared to 19% of the year, followed by the end of the price of consolidation since the mid-eighties of last century's economic upturn. Thereafter in 1991 the economy began to rise in mid-term, CPI in 1994 hit a record 24%, followed by severe credit crunch to promote rapid cooling of the economy, coupled with the impact of the Asian financial crisis, the superposition effect, rarely appeared in China's macroeconomic deflationary period.

Although recurrence is unlikely that the high inflation, but the logic of the economic cycle may be performed in miniature form.

Currently, concerns about the decline of economic growth has given way to rising house prices and inflation concerns. Third quarter economic growth rate over the second quarter year on year decline in fourth-quarter growth rate may be lower. However, seasonally adjusted, three-quarter annualized GDP slightly higher than the chain off the previous quarter, the macroeconomic gradually stabilized. Overall, the slowdown in growth since the second quarter is the result of policy control, so the economic soft landing rather than a hard landing more likely. For some time, I have been using a micro-stagflation to summarize the first half of this year's second quarter of next year's macro-structure, and has repeatedly expressed and asset prices on inflation concerns. Although the hikes later this year in July in monthly weakened, but the CPI turning point not predictable, but is rather Diego record high during the year.

China's future will continue to increase inflationary pressures, if inadequate control will increase the risk of future economic downturn. This year, agricultural products and even Chinese herbs, fruit prices rose one after another, it is not accidental. Of some natural disasters occur every year. But overall, this year's grain output is stable, but this did not affect some agricultural prices. Choosing the main points of future sources of inflationary pressures can be summarized as the following aspects.

First, in response to the crisis period, the money supply and credit to extraordinary growth. Economics tells us that the impact of money supply itself is an important source of economic fluctuations. The effect of monetary expansion will continue to appear in the next few years. The rapid growth in money supply will not necessarily bring about price increases, since the mid-nineties of last century, China's monetary growth has rapidly, but inflation is relatively stable. In fact, over the past 30 years, China's M2 growth rate at 23% of the average GDP growth rate of more than 10 percentage points or more. Now, M2/GDP almost 200%, while the U.S. only 60%. Such a high rate of money supply growth could be sustained, such a large stock of money in the end what it means, are worthy of further study. Clearly, the Chinese currency deepening level is so high, and the huge foreign exchange are linked, these foreign exchange are frozen by various means with the central bank. Furthermore, this indirect financing of China-based financial structure. In countries where the main bank system, M2/GDP the higher than usual. Nevertheless, although money growth is not a sufficient condition for price increases, but at least is a necessary condition, is the basis of higher inflation.

Second, economic growth potential is declining, this is another strong long-term cause of inflationary pressures. Financial crisis has changed to some extent, global economic growth model, including the Chinese growth model, including a series of structural adjustment is being progressed, these adjustments will improve the quality and sustainability of economic growth, but also affect economic growth speed. Demographic factors, but also will push down China's savings rate and investment rate. China in the future, it is necessary to net exports and GDP of 5% less than in the control, which would mean somewhat lower growth rate. Decline in economic growth potential, which means lower demand for money, the current money supply growth is still relatively fast, the rise in prices will face even greater pressure.

Finally, a variety of changes in economic structure will also increase the risk of rising prices. Reform of income distribution was the eighties of last century an important reason for rising inflation. With the increase in lower-middle class income, subsistence will usher in a greater increase in power prices, which in the CPI basket of goods account for a large proportion. In particular, rising wages, rising prices has become important to promote a variety of reasons. Under the influence of various factors, the magnitude of wage increase in recent years has caught up with the rising rate of labor productivity, a trend expected to continue. In addition to the labor factor prices other than the reforms will be accelerated, including the strengthening of environmental protection, which will increase their costs.

Pressure based on the reality of rising prices, some experts have recently proposed to increase the tolerance of inflation, this does not mean inflation rate of around 5% is appropriate, but to control inflation in order to avoid suppressing economic growth quite upset. Compared with 2000, just before, the current social tolerance for inflation has dropped significantly, double-digit inflation rate will cause a lot of distortion and confusion. This means that China's policy of tightening or will occur earlier. Inflation and thus the height and the decrease in economic growth will be narrowed.

In view of the future will continue to increase inflationary pressures, policy face the need to take precautions to avoid future need to greatly tighten and bring a hard landing risk. Inflation is the government a way to reduce the tax burden, but taking into account the Chinese economy will maintain rapid growth, fiscal revenues will rapidly increase, the need to impose inflation tax is not large. Policies can lower the growth rate of money supply to decline and economic growth potential match, sent down over the magnitude of the currency. Also, should accelerate the expansion of the depth and breadth of financial markets to guide the rational distribution of the money stock. If we consider a number of structural reforms and the future prices of production factors to the price system the pressure may also need earlier and more effectively control the rate of inflation uplift.

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