Qiren Zhou: Right Choice of China’s Economic Policy


 date:2008-8-20 9:49:00 source:BiMBA         

Right Choice of China's Economic Policy

Qiren ZHOU

Professor, CCER at Peking University

The theory of imported inflation is problematic as there are various inflation rates in different countries given the same international resource prices. Oil-exporting countries like Russia and Iran have high inflation, while oil-importing countries like Japan and Korea enjoy low inflation. The difference in inflation rate is also significant for different emerging economies such as India and Brazil.

Recent inflation in China is the result of inflexible exchange rate. Although fixed exchange rate is helpful for developing countries to establish macroeconomic discipline, it has not been appropriate for China since 2003 because of fast growth in manufacturing productivity. Inflexible exchange rate has forced the central bank to issue too much money. Oversupplied money pushes up asset prices first and then CPI.

China is able to maintain economic growth no matter whether US economy becomes stronger or weaker. Firstly, China's energy consumption is composed mainly of coal and can be less affected by high oil prices by using more coal. Secondly, there is much room to increase grain production. Thirdly, domestic demand is huge, and tertiary industry is still at primary stage. The goal of maintaining economic growth should not be the high growth rate in 2007 but is to avoid too fast contraction. 

It is vital not to relax monetary supply otherwise there is no way to implement structural adjustment and complicated reform. The relief measures to regions hurt by the earthquake and to regions hurt by international market recession should be taken through structural adjustment with given aggregate. The so-called financing problem of small and medium-sized enterprises can not be solved by loose money supply. The right prescription for them is to develop small and medium-sized private financial institutions.

 
 
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