According to China's National Bureau of Statistics (N.B.S.) released financial data for the third quarter. The data showed China's economy was growing slightly faster than expected, but that persistent inflation may curtail future growth. Because Beijing has limited options for reversing this trend, inflation may require some important political changes.
A Growing Problem
According to the china's N.B.S., the third quarter ended with an inflation rate of 6.2 percent, just below the ten-year high set earlier this year. This level of inflation is high enough to cause concern. Moreover, it is unlikely that the official rate is the real rate. The Chinese government maintains a system of price controls for many goods, including gasoline. The price of oil on the international market jumped from US$65 to $85 per barrel during the third quarter, while the price of gas at China's pumps has remained relatively constant. Mainly china’s monetary policy and other strategic policies are secrets and unkown to other countries.
Factors responsible for Inflation growth:
Growth in the price of agricultural commodities. As global oil prices have surged, more and more farmers have dedicated their crop of wheat, sugar, and corn to the production of ethanol. As an increasing percentage of the crop is used for ethanol, less is available for consumption, resulting in price growth.
Only a few years ago, the average Chinese citizen drank five liters of milk per year. The figure now stands at 25 liters per year. As China demands more milk, both dairy and cattle prices will naturally rise.
Tactics to minimize the exchange rate: Chinese citizens are not allowed to hold foreign currency. When a Chinese manufacturer exports his products to the United States, he is generally paid in dollars. Yet, he is not allowed to keep the foreign currency. He must hand it over to the government in exchange for yuan. This allows the government to retire dollars from circulation. As dollars on the international market become scarcer, their price goes up. This allows the government to keep the yuan weak relative to the dollar, which benefits the export sector.
An inevitable consequence of this policy is that growth in the supply of yuan in the domestic market is tied to growth in the export sector. As exports grow, the money supply grows; as the money supply grows, there are more and more yuan chasing the same goods; inflation cannot help but follow. Exports grew by 27.1 percent in the first three quarters of the year, 0.6 percent higher than the same period last year. China's foreign exchange reserves have swelled on strong exports to roughly $1.5 trillion, and are growing at roughly $1 billion per day. At this staggering rate, it is clear why inflation is spiraling upward.
Additionally, the National Development and Reform Commission (N.D.R.C.) has expressed great unease with the current levels of inflation. According to Xinhua, "Zhu Zhixin, deputy director of the N.D.R.C., warned that the risks of an overheated economy remained, and preventing excessive rises in consumer prices should be a major macro-economic control priority." Officials in the Ministry of Finance share this view, and have been trying desperately all year to curtail inflation.
Attempted Solutions
The four policy levers at their disposal are: raising the interest rates, raising reserve requirements, issuing government bonds, and easing restrictions on investing abroad. In principle, raising interest rates and reserve requirements will decrease investments, while issuing bonds will soak up excess liquidity and easing restrictions on outbound investing may send the excess liquidity abroad.
The government has already raised interest rates five times this year and has raised reserve requirements eight times. Nonetheless, investment in the first three quarters of the year grew 25.7 percent as banks funded 170,123 new investment projects, 18,151 more than the number of projects that were funded all of last year.
Can Do
The Chinese government can get a handle on inflation in two ways: either by changing the market conditions or by changing the political culture. Unfortunately, due to the current ineffectiveness of monetary policy tools and the irrational exuberance of Chinese investors that are fueling the bubble, there are not many options for a market oriented approach to reining in the bubble. This seems to indicate that the government can either wait for the bubble to burst, or they can precipitate a change in the political culture.
In this situation, I believe that our expectation or vision 2020 would be achieved because comparatively our government, RBI and other institutions are really working hard to streamline the system with the growth rate of market and for curbing inflation. In this quarter inflation in our country was 4% comparatively very lower than china.
sources:
WWW.PINR.COM
CHINESE NBS (National Bureau of Statistics ) Report
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