Will the Chinese Economy be Caught in Stagflation?

Normally speaking, to tell whether an economy will run into stagflation we will see whether the inflation rate exceeds the economic growth rate. The author thinks that China’s price rise speed still fall behind the economic growth rate by a certain margin, which will not lead to economic stagflation.

But the chinese government seems to take no account of the risk of economic stagflation when exercising economic measures. It just invariably tightened the money liquidity, exerting great pressures on the capital supply of banks and causing severe impacts on the companies and especially the middle-sized and small companies. It is possible to witness a further rise of the inflation rate because of the relatively abundant liquidity, while a drop of the economic growth rate due to the increasingly difficult fund-raising. If so, the inflation rate will approach and even surpass the economic growth rate.

On the “2nd Global Think Tank Summit” held recently, economists entered into heated discussions on whether the Chinese economy is caught by stagflation. Although most economists denied the possibility of stagflation and placed emphasis on ways to prevent inflation, under certain economic circumstances, the “minority” may gain an upper hand over the “majority” and represent the truth.

Considering the facts about the Chinese economy, the May CPI was 5.5% and the economic growth rate remains around 9%. Although various parties are predicting that the CPI in June might hit a new high, but it is impossible to surpass the economic growth rate. Does this imply that the Chinese economy would run no risk of stagflation?

It is widely known that under nor- mal conditions, to tell whether an economy would have stagflation we will see whether the inflation rate would exceed the economic growth rate. If this happens, then the risks of inflation would emerge. One thing that needs our attention is that we are talking about “under normal conditions”. If something special or contradictions happen during the economic development process, we will not be able to measure stagflation by comparing the inflation rate and economic growth rate.

Considering the inflation, now the Chinese overall price remains in a controllable range and it is generally said that from July the price will begin to drop. But three factors need our great concerns. First is the great pressure from the worldwide inflation. As imported inflations will not disappear in the short run, the stress on China’s efforts to curb inflation will not be relieved; second is the structural factor pushing up the domestic price level. Those who provide products priced by the government have great impetus and high demands for raising price, such as water, electricity and natural gas providers. Also, inflation pressures on the wage remain strong, which would cause great impacts on company’s costs; the third is the huge amount of social capital but limited channel for investments. The government has done little to guide or make flow these abundant capitals, which incurred high risks of unregulated price. For example, the speculation on farming and sideline products creates a great pushing force towards the price. Also the government seems to lack ways and solutions to effectively crack down on such speculations.

Because of these factors the price may not slide quickly as expected. Even if it really happens, it may experience ups and downs and the rebound might be very strong. Therefore, the condition of high price would not change significantly.

While looking at the economic growth, as the Chinese economy increased less rapidly in the past several months, many international institutions and foreign governments have lowered their expectations about the Chinese economic growth, thinking that the Chinese economic growth rate this year will stay around 8%. If this could be achieved, it is quite acceptable.

We should take a scientific, objective, impartial and fact-based approach to analyze and evaluate the Chinese economic growth rate, rather than firmly believe that the stagflation would never happen if the economy grows faster than the inflation.

We should also be highly concerned that although the Chinese economic growth remains highest of the world, but if measured by the standards raised by the Central government about economic transition and structural readjustment, the real economic growth may not be as high as the data indicates. The government investment and real estate development still have great

impacts on the economic growth rate and account for a huge proportion of the whole economy. Also, the speed of economic restructuring is still slow and the quality of economic operation is not satisfying.

Based on these judgments, this author thinks that although the Chinese price rise still lags behind the economic growth rate, and may not trigger economic stagflation, the problem might be more complicated and the stagflation will emerge if eliminating the influential factors.

More importantly, the current measures seem to take no account of risks of economic stagflation. The Chinese government always tightens its liquidity and does not raise the interest rate. The amount of money does not change significantly and the upward pressures on the inflation have not been relieved, which brings the bank’s capital under great strain and poses great impacts on middle-sized and small corporations. The inflation might become more severe due to the abundant liquidity, while the economic growth rate might fall due to the difficulty in financing. Therefore, the inflation rate might approach and exceed the economic growth rate. If the situation is reversed, the economic stagflation will happen. Just like the economist Li Yining criticizes, do we have to make so many efforts to make the circulation of money normal, only to find that another stagflation will happen?

(The author: from China Business Times)