Taming Chinese inflation

Published 10 November 2011 05:00

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Australia has obvious and inextricable links to China’s economic fortunes. Some important events and figures unfolded towards the end of October that should be of great interest to Australians.

Five interest rate rises and nine increases in bank reserve ratio requirements in the past year have clearly slowed growth in China from its double-digit pace of last year.

Premier Wen Jiabao has underscored that taming elevated inflation remains Beijing’s top economic priority.

Figures released late in September showed gross domestic product growth slowed to 9.1 per cent in the third quarter, the lowest in nearly two years, from 9.5 per cent in the previous quarter.

Wen said in the coastal city of Tianjin that China’s policy makers stood ready to “fine-tune” policy amid concerns about the slowing pace of growth in the world’s second-biggest economy.

“We will maintain control over the intensity, pace and focus of macroeconomic regulation and strike a balance among maintaining stable and fast economic growth, adjusting economic structure and managing inflation expectations,” he said.

The People’s Bank of China is finally making headway in its battle against price pressures, with inflation falling to a yearly pace of 6.1 per cent in September, down from a 37-month high of 6.5 per cent in July, which was picked up with the HSBC flash purchasing managers index bouncing back to the critical 50 mark, to 51.5 in October – a five-month high.

Most economic observers now believe China is on track for a soft landing rather than a hard one.

Standard Chartered Bank’s respected Stephen Green, who heads its greater China research team, recently forecast that China’s economy would grow 8.5 per cent next calendar year, down from the 9.4 per cent in the first three quarters of 2011.

The yuan has also risen 3.7 per cent against the US currency this year and 7.4 per cent since June last year, when China essentially unpegged its currency from the US dollar.

This trend is also expected to continue.

Encouragingly, China is also exhibiting a healthy domestic consumption pattern and even though export growth has slowed owing to weak demand in the United States and Europe, retail spending rose at a yearly pace of 17.7 per cent in September, up from 17 per cent in August and adjusted for inflation, retail sales grew at a yearly pace of 11.8 per cent.

Indeed, China’s National Bureau of Statistics has said consumption growth over the first three quarters of 2011 accounted for 47.9 per cent of the growth in GDP during that time and that spending has been underwritten by a rise, year-on-year, in urban disposable incomes during the first three quarters of nearly 8 per cent, with cash income rising for rural households by nearly 14 per cent.

That solid domestic demand has further emboldened most economists to predict that China is most likely to avoid a hard landing, despite higher interest rates and stricter curbs on bank lending aimed at taming elevated inflation and to continue slowing growth in the property market.

So China’s chronic social problems – which include much-needed reforms to the pension and health systems, as well as the household registration, or “hukou”, system and the necessary ongoing reforms and further liberalisation of the financial market – need not develop into an acute crisis any time soon.

However, it is still unclear whether the new leadership team that is due to take over the running of China next October will have the drive to achieve the consensus needed to push ahead with these reforms in order to build a more sustainable growth model.

I think they will.

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