Issue of the week: China’s inflation dilemma

last updated 8 January 2015

Hu Jintao is walking a tightrope, and if he loses his footing, the global economy could tumble with him, said Heda Bayron in VOAnews.com. This week the Chinese president unveiled a major shift in economic policy, pivoting from the loose-money stance that has helped to power China through the global financial crisis to what he called a “prudent” approach to wages and prices. Translated from bureaucratese, Hu’s statement acknowledges that the Chinese economy is overheating, with rising food costs in November contributing to a 5.1 percent annualized inflation rate, up from 4.4 percent in October. In a command economy like China’s, price controls can keep inflation temporarily in check. Indeed, officials in the southwestern city of Kunming recently ordered retailers Wal-Mart and Carrefour to notify authorities of any plans to hike prices on necessities. But the government will find it harder to rein in “price pressure that comes from the banking side.” The Chinese government’s $600 billion stimulus package in 2009 spurred “runaway lending and investment,” leading to bubbles in real estate, stocks, and commodities.

Hu can’t afford to clamp down too hard, though, said J.C. de Swaan in The Wall Street Journal. Recent minimum-wage increases “across most provinces” are one source of China’s inflation. It would be a mistake to undercut those rising wages, which are necessary if the country is to achieve its “goal of a gradual shift to more consumption-driven growth.” China would do better tightening its money supply and letting its undervalued currency, the yuan, appreciate. China’s government does plan to raise interest rates, said James Kostohryz in Minyanville.com. But in a country where “consumer finance constitutes a negligible portion of overall consumption,” rate hikes won’t do much to crimp spending. China’s only real inflation-fighting option “is to slow growth very substantially,” a path that China’s leaders, ever wary of domestic unrest, simply won’t follow.

But if Beijing doesn’t clamp down, China’s inflation may spread, said South Korea’s Yonhap news agency. South Korea’s top central banker, Kim Choong-soo, this week warned that China’s inflation could spill across the border, unleashing an inflationary spiral here. Rising demand for more costly Chinese goods, he explained, “could put upward pressure on local consumer prices.” Investors don’t seem to share that worry—so far, said Richard Milne and Aline van Duyn in the Financial Times. Asian and European stocks rose immediately after Hu’s announcement of a policy shift, as investors expressed relief that China wouldn’t be raising interest rates immediately. But “the markets might be shrugging off too lightly the risks of a jump in inflation” in China. If rising prices start eating away at their assets, investors may wish they’d reacted sooner.