Guoqing Song: Great Adjustment of Income and Wealth


 date:2008-11-5 10:10:00 source:BiMBA         

Great Adjustment of Income and Wealth

Guoqing SONG

Professor, CCER at Peking University

Professor Song addresses the significant effect of import and export prices on national income and wealth. Similar effect is between the inflation and households' income.

The imports and exports prices affect the national income and wealth in two ways. Firstly, the term of trade affects real national income through current export and import. As the term of trade deteriorates, the same amount of exports can only buy fewer imports. In the first three quarters in 2008, rising petroleum prices have cost China additional 50 billion dollars.

At the same time, previously accumulated foreign reserve will depreciate as imports prices rise. In the twelve months till the end of August 2008, the imports price index grows by 22.7%. As a result, the foreign reserve, valued at 1.4 trillion dollar by the end of August 2007, had lost 18.5% of its original value, namely 260 billion dollar, by the end of August 2008.

To sum up, China losses 300 billion dollars in the twelve month till August 2008 due to deterioration of the term of trade and rising import prices. The payoff is much bigger than the 2 percentage loss in GDP growth, which is several hundred billion yuan.

Fortunately, the trend has been changing. Imports price index dropped by 10% in this September. It is likely to falling further due to the global financial turmoil and the slowdown of domestic demand. While the global financial crisis squeezes export demand in the short term, collapsing commodity prices will benefit China from the supply side in the mid-to-long term.

Inflation and consequent negative real interest rate erode the deposits of the households, especially when 44% of the Chinese households' financial assets are demand deposits with little interest. While the CPI growth rate is about 6% in 2008, the real return rate of households' financial assets is negative 4%. However, when the economy goes into deflation in the next year, the real return rate of households' financial assets will be positive 1-1.5%. It means the households' income will increase 1 trillion yuan in 2008, compared with 2007.

 
 
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