2010-07-07 09:55

Moderate rate of inflation better than side-effects from deflation

Editor's note: The Chinese economy has been sandwiched between rising inflation and downturn risks. Its consumer price index (CPI) is expected to pick up further after it rose 3.1 percent in May, exceeding the government target of 3 percent for the whole year, while the external shocks caused by European debt crisis and unstable US economic recovery add to worries that the Chinese economy could slow down in the second half of this year. Economists, however, said serious inflation would not occur in China, and the economy is set to slow down in a scenario that is far from any hard landing.

Zuo Xiaolei

Zuo Xiaolei, chief economist of China Galaxy Securities

We cannot simply regard rises in CPI as serious inflation, because each economy has its own tolerable level of inflation, which is determined also by its income growth rate. It is true that consumers have to increase expenditure when overall prices are rising. However, if the income growth rate is higher than the price rises, the growth in expenditure will be affordable to them.

CPI might increase by 3 to 4 percent this year in China. But compared to the income growth of 9.3 percent and 9.2 percent in urban and rural areas respectively in the first quarter of this year, China could afford even 6 percent CPI growth for the whole year.

China has not seen serious inflation. It usually takes two to three years for an economy in recovery to suffer any serious inflation. The problem for China, however, is that it must properly manage liquidity so that the ample liquidity would not lead to exceptional growth in inflation.

Jia Kang

Jia Kang, director of the Institute of Fiscal Science Research under the Ministry of Finance

China's consumer price index will not be very high this year. Our target is to keep CPI within 3 percent, but whether we can achieve this will depend on external conditions in the second half of the year and the central government's macro-control measures.

It is not important whether CPI turns out to be slightly higher or lower than the target of 3 percent for the whole year. If CPI is slightly above 3 percent, it means that price increases are moderate.

In Western economies, it is acceptable if CPI is below 4 percent, which is dubbed "moderate inflation". I would rather see moderate inflation than deflation, because in China, deflation is often followed by unemployment pressure and overall political pressure. We need to think about how to extend the period of moderate inflation, which is good for China.

We should attach great importance to controlling inflation, but should also avoid taking overly stringent measures and prevent the ensuing negative impact of a over-reaction on the economy. We should make policies flexible, especially in the current uncertain situation.