Problem of China’s Inflation

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Table of Contents

Introduction
Description of the Chinese inflation
Solutions to the problem
Proposed solutions
Conclusion
Works Cited

Introduction

Inflation is a condition of persistent increase in prices of products, especially the consumer products in an economy. It is measured by Consumer Price Index (CPI) and the GDP deflator. China has been experiencing inflations for several years. The country experienced the highest inflation rate in 1994.

During this period, the inflation rate was at 27.70%. The lowest inflation rate experienced in the country was -2.20% in 1999. It was reported that the country had an inflation rate of 5.5% in October 2011. Consumer prices increased by 5.5 percent in 2011 because there were few supplies compared to the high demand (Back, p. 1). The global economic crisis that was experienced in 2008 had a great impact on the economy of China.

During this period, China had a high inflation rate in 2008 but this started to decline as time progressed to 2009. By July 2009, the country had the lowest inflation rates, but the rates started to increase rapidly in 2010. In the year 2011 the country had experienced inflation rates ranging to 7 percent. During the first quarter of the fiscal year 2011 the country experienced an increasing inflation rates. However, towards the last quarter of 2011 the inflation rates started to drop (Song and Golley, p. 157).

Description of the Chinese inflation

The escalating oil prices have been blamed for the inflation in China. Economists provide that global oil prices have been increasing uncontrollably, and this has affected the productivity of the Chinese economy. With the increase in oil prices, energy costs have increased, and this has resulted into an increase in the prices of products manufactured in the industries. Cost of production has increased, and most manufacturers find it impossible to manufacture some products.

In some cases, manufacturers have been forced to provide goods and services at high prices to cater for the production costs. This has caused reduction in the output from most industries. In addition, this has resulted into uncontrolled price increases because the output has not been commensurate to the demand for such products. The supply-demand gap has resulted into price inflation on most consumer goods (Song and Golley, p. 157).

In 2009 the government made a policy to increase the liquidity of the economy. This policy has worsened the inflation in the country. The People’s Bank of China issued excess currency to the economy and this affected most of industries in the economy. This policy was followed by an increase in the money supply in the economy.

The economy is suffering from the side effects of the policy. Control measures to reduce money supply in the country have been put by creating monetary policies. These policies have focused on improving the economy of most industries in the country. Interest rates have been increased to reduce the lending rates, and to obtain the excess money in circulation. The excess liquidity has affected other sectors of the economy such as stock market, housing industry and others (Shaw and Liu, p. 160).

Output gap has also caused the inflation. The high demand of consumer goods has increased inflation because there is a large difference between output and consumption demand. The reduction in outputs has been caused by the increasing cost of production. Most manufacturers find it costly to produce goods and services.

This has resulted into the prices of products increasing at a high rate. The decline in output has forced the country to depend on imports. Depending on imports has caused the economy to experience increase in foreign debts. For example, farmers in the country incur a lot of costs to produce farm products. This has caused food prices to escalate. In addition energy prices have increased rapidly. It is estimated that the prices of food and energy products have increased by 24% and 32% respectively in 2011 (IMF, p. 57).

In China the housing prices dropped by 25 percent in 2011. Housing industry has been affected by the inflation. In fact, the housing boom was reported to be the major cause of the inflation in 2008. The banking industry had issued subprime debts, and this caused a high crisis when the lenders were unable to repay the debts.

The banking sector made a lot of losses and this lead to spillover effects to other industries in the economy. The housing industry has not yet recovered from the shock, and it is expected that a decline in the industry will continue. Most investors have lost confidence in the housing industry, and this has caused a lot of losses to be made in the industry (Shaw and Liu, p. 161).

The capital market has been by the inflation because most of the stock prices have reduced tremendously. The capital market has been providing the country with a lot of foreign exchange, but with the inflation most investors fear Chinese stocks. This has affected the stock prices such that most companies are finding it hard to raise capital from the market. This has affected the productivity of most industries (Shaw and Liu, p. 162).

Unemployment in china increased during the inflation because most industries were unable to accommodate the high labor force in the country. Most industries had to cut down the labor force because the productivity had reduced.

Retrenchment strategy was adopted by industries to reduce the costs of production. The high rates of unemployment have affected the stability of the economy and the government is worried about the progress of its labor market. The government has imposed strict measures to increase employment opportunities (Shaw and Liu, p. 165).

In October 2011 the country started to experience decline in inflation rates. According to Black (2011) “China’s inflation slowed significantly in October, potentially opening the door for policy makers to begin to loosen the reins on the nation’s economy, as worries over a global slowdown supplant fears of inflation as their main concern,” (p.1).

Tourism industry has reflected some improvement after the country started to recover from the inflation. The country has started to gather investor confidence and it is predicted that the economy will regain its performance in the near future. Food prices have started to decline, and it is expected that the government will be able to improve the living standards of its people (Zhang, Song and Liu, P. 114).

Solutions to the problem

Both monetary and fiscal measures have been enacted to improve the inflation rates in the Chinese economy. The monetary policies have focused on regulating money supply in the economy. Fiscal policies have focused on increasing the rate of employment, government expenditure, taxes and other fiscal tools.

The government has adopted selective easing to some industries as a control strategy to maintain the inflation rate. Small businesses have been supported to improve the income and living standards of small income groups in the economy. Projects have been established to provide low cost housing to the citizens affected by the housing boom. The government has established strategies to construct public housing.

This strategy is aimed at improving the living standards of the affected families. The government aims at supporting the investors who lost their capital during the housing boom. Improving investor confidence in the housing industry has been a major project by the government. This strategy has been focused to maintain the housing industry, and to increase global investor confidence (Lin, p. 228).

The government has published a plan that will run for twelve years, and it is aimed at increasing the economic growth by at least 7 percent. Development objectives by the government were provided in the strategic plan. Environmental plans have also been included in the strategic plan to ensure that the country’s economy develops while maintaining the environmental safety standards.

Income distribution has been placed as a major aspect to be achieved in the strategic plan. It was observed that the inflation in China resulted to income differences such that the poor have become poorer while the rich have become richer. To create economic balance, the government has put a requirement that the strategic plan will focus on creating income equality (Organization for Economic Co-operation, p.26).

The government has put strategies to improve the quality and quantity of exports as one of the measures to reduce inflation. The 12 year strategic plan aims at increasing the GDP of the country by encouraging all the economic sectors to increase efficiency and effectiveness of their production.

The government has encouraged investment growth by encouraging private consumption. This plan will help reduce government expenditure, and this will maintain low public expenditure. The government has also encouraged the growth in the service sector, as one of the strategic plan to alleviate the inflation rates (Organization for Economic Co-operation, p.26).

Increasing subsidies to farmers has been another strategy used by the government to maintain low inflation rates. This policy has been introduced to increase food supply in the country. Transport charges have been reduced to enable farmers produce food products at low costs. Some companies offering farming inputs have been refrained from increasing prices, so that farmers can easily access inputs at reduced prices (Lin, p. 229).

The interest rates have been increased to as high as 21.5 percent to reduce the money supply in the country. The People’s bank of China aims at reducing the borrowing power of people in the country. The bank increased interest rates by about five times since October 2010.

This has boosted the reserve requirements of the bank nine times. This strategy has caused a lot of complaints from small businesses because they cannot access credit. The government has resolved to cut down the taxes to companies, to enhance high production in the economy (Lin, p. 230).

Intervening in the problems facing the housing industry has been controversial because the government is not ready to waver in the real estate industry. Economists propose that the government need to reduce the housing prices to reasonable levels. The housing industry has affected the economy and the government fears cases of future crisis in the industry.

The government cannot deregulate the housing industry because this may affect other industries in the economy. Previously, the housing boom had been caused by regulation policies created by the government. However, after experiencing crisis from the industry, the government has reinstated the regulations in the industry to contain the situation (Bardhan, Edelstein, and Kroll, p.276).

Proposed solutions

The government ought to regulate the housing industry. This sector was one of the major causes of the inflation in the country. This should be enacted by putting in place strict laws to regulate the industry. The government should have a commission to oversee the prices and activities of the industry.

This will help reduce adverse effects of unregulated industry performance. This strategy is cost effective because the commissioners will be sourced from public service. Controlling the housing industry is practical because the government can put sanctions or policies to reduce the influence of the private sector in the industry.

Establishing laws to reduce activities in the industry is feasible because law makers need to amend the constitution of the country to fit the prevailing conditions. The short term impact of the strategy will be that government will be put at task to establish a workable commission. The long-term effects are that the housing industry will be properly regulated and investors will have better returns and fewer risks.

The government should reduce taxes on farm inputs. This will help farmers produce at reduced costs, and food prices will be reduced. The high food prices experienced in the country have resulted from the high farming costs. The strategy of reducing taxes on farm inputs is feasible because it will provide the government with proper mechanisms of improving food supply.

Food exports will also increase, and the government will collect more income from exports. However, reducing taxes on farm inputs will affect the revenues collected by government from the inputs. This will have the government budget in the short term. In the long term, the economy will achieve more gains because food production will increase and exports will be improved. As such, the output gap will be reduced, and the economy will experience low foreign debts.

Conclusion

China has experienced inflation which has affected the economy. The inflation started in 2008 and has been spreading over the years up too date. It has been explained that the inflation has been caused by collapse in housing sector, poor government policies and inflation from other countries.

The inflation was worsened by the policies government made in 2009 to increase liquidity in the economy. This increased the supply of currency in the economy. Food prices escalated and most industries started to drop in production. The inflation has resulted into drop in the export of the country, and decline in the performance of most industries. The rate of unemployment has also increased due to reduced economic performance.

The government has put fiscal and monetary measures to control the inflation. This has achieved some positive results because the inflation was reported to decline in October 2011. The government ought to reduce the taxes on farm inputs as a strategy to reduce the costs incurred by farmers. In addition, the housing industry should be regulated to minimize the negative impacts of the industry on the economy of the country.

Works Cited

Back, Aaron. China’s inflation slows. The Wall Street Journal, November 2011.

Bardhan, Ashok D, Robert H. Edelstein, and Cynthia A. Kroll. Global housing markets: crises, policies, and institutions. Hoboken, NJ: Wiley, 2011.

Edwards, Nick and Langi, Chiang. Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by “fine tuning” policy. Reuters, November 2011.

IMF, Regional economic outlook, Asia and pacific, April 2011. International Monetary Fund, 2010.

Lin, Justin Y. Demystifying the Chinese economy. Cambridge: Cambridge University Press, 2011.

Organization for Economic Co-operation. African economic outlook: 2011. Organization for Economic, 2011.

Panckhurst, Paul. China’s case for stimulus mounts as inflation slows with property cooling. Blomberg, 2011.

Shaw, Daigee and Bih J. Liu. The Impact of the Economic Crisis on East Asia: Policy Responses from Four Economies. Cheltenham, U.K: Edward Elgar Pub, 2011.

Song, Ligang, and Jane Golley. Rising China: global challenges and opportunities. acton, A.C.T: ANU E Press, 2011.

Zhang, Guangrui, Rui Song, and Deqing Liu. Green Book of China’s Tourism 2011: China Tourism Development Analysis and Forecast. Heide: COTRI, 2011.

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