Loose US Monetary Policy Causes Inflation in China

According to statistics from the National Bureau, in September 2012 the national consumer price index increased by 1.9 percent overall, with growth rates of 0.3 percent month to month and 2.8 percent over the last nine months. What do these index changes indicate? Does it mean that China is bidding farewell to inflation? Does it mean that the economy is gradually improving?

These statistics show that the general price level has been effectively regulated, but the data itself only show that the national consumer price level of the previous stage is under control. But the statistics cannot fully illustrate the factors that influence the overall price level; nor do they reflect the core price data or the survey points and comprehensiveness of the statistics. As everyone knows, the consumer price level is illustrated by the consumer price index, which includes tangible material consumption and intangible services consumption. The consumption of residents in China mainly includes food, tobacco and liquor products; clothes, household equipment and maintenance services; health care and personal products; transportation and communication; entertainment and educational products and services; and eight categories of goods and services that can be further divided into 262 basic classes. Certain content used to measure the CPI is not included. The sampling data of the statistics only covers 500 cities and countries in 31 provinces and autonomous regions. Surveys are conducted in 63,000 locations, including grocery stores, department stores, supermarkets, convenience stores, specialized markets, franchised stores, shopping centers and farmers markets. These survey locations are relatively fixed. As economic and social situations change, the original contents of statistics do not suit the new situation, so the core and non-core price data need to be adjusted dynamically — especially the statistics for service prices, which can be inaccurate and ineffective for describing the actual situation objectively.

Factors that affect CPI present a lagging effect. Typically the volume of currency issued and the rapidity of circulation influence the price level the most. Within a country or an independent economy, an increase in the amount of currency in circulation or an excess of money relative to demand in the economic operation may cause a rise in price levels. Under the same circumstances, an increase in the circulation rate, equivalent to an increase of currency in circulation, may also cause prices to rise. Since the outbreak of the international financial crisis, major countries around the world have adopted many positive and loose monetary policies, especially the United States, with the implementation of quantitative easing, which continually increases the volume of U.S. currency, leading to a global rise in consumer price level. In the context of economic globalization, China has not been spared. Because China is influenced by U.S. monetary policy, the country experienced inflation and a significant lag period. Recently the United States announced the implementation of QE3, whose impact will come in the future and is likely to be reflected in a price rise in China.

The price level in housing is always a double-edged sword. At present, the Chinese government is unswervingly regulating the real estate field, with all levels of government vigorously promoting the construction of affordable housing to provide more housing resources and adjust housing prices. Government departments further increase the supply of land resources and adjust the structure and proportion of affordable housing and commodity housing. Land inspection teams and supervising teams sent out by the central government collaborate closely with the local government to achieve stable results. It is foreseeable that, because the economic and social situations have not yet fully recovered, the slightest slack in regulation will cause residential housing consumption levels to rise. This in turn may cause social welfare to fall, and the progress resulting from previous efforts will have been wasted.

Changes in CPI cannot reflect the structural adjustment and economic trends. China’s economic and social development model is constrained and is undergoing structural adjustment and transformation in order to adapt to globalization and regional integration. It is difficult for CPI to reflect structural changes and economic and social transformation. After 30 years of reform and opening up to the outside world, China is in a critical period of industrialization, urbanization, marketization, and globalization. China’s construction of a modern economic and social road is unprecedented. There are no ready-made lessons available to explain inflation. Traditional theories of economic growth are no longer applicable.

　

Overall, the consumption level in September 2012 reflects that the consumer price level at the present stage is smooth and relatively low compared to the same period last year. Nonetheless, the core price level content is constantly changing and affecting the level of consumer prices in the lag period. Its effects are not reflected immediately. The impact of loose U.S. monetary policy is broad, especially in China. In the future, the price level of residential housing still faces pressure to rise. Of course, it is impossible for the CPI to show more profound content, especially deep structural problems in the economy and society. Also, it cannot signal whether the economic situation is improving.

The author is a researcher at the Development Research Center of the State Council.