Inflating China – OPINION
at Wall Street Journal
By STEPHEN GREEN
June 3, 2008
Many people in China right now call these the country’s Golden Years. But after a fantastic run of double-digit growth, bigger pay packets, low inflation and growing international influence, clouds are now forming over China’s economy. Most obviously the dark weather of the snowstorms earlier in the year and the terrible earthquake in Sichuan have rocked the country’s confidence. Less tangibly, but more importantly for the economy, stronger inflation is emerging. And there is a danger that the hard decisions needed to break it will not be made while there’s still time to do so relatively easily.
[Inflating China]
In part, this is because policy makers are only gradually grasping the magnitude of the inflation threat. On the surface it looks like inflation as measured by China’s official consumer price index has been driven by food, primarily pork and edible oil. CPI has exceeded 8% year-on-year in recent months (but looks set to fall below 8% in May). Exclude food items, and prices overall only rose 1.8% in the year to April.
But few people believe this is an accurate reflection of price trends on the street. Higher service-sector prices in health and education are likely not adequately reflected in the index, while the basket of goods surveyed is updated only once every five years. The GDP deflator – an overall measure of inflation also calculated by the government – was up to over 8% year-on-year in the first three months of this year.