In an interview with People's Daily published on
September 12, Li Yang, director of the financial research institute
under Chinese Academy of Social Sciences, gave an in-depth analysis
on inflation issue in China's fast growing economy.
According to Li, inflation will not remain a major headache for
the Chinese economy in the medium and long term.
He said the consumer price index (CPI), an important inflation
gauge, has been maintained at an overall steady and low level in
China, quoting figures since the Asian Financial Crisis in
1998.
After consecutive years of negative growth at the end of last
century, the CPI rebounded a little at the turn of the century, but
continued its downward trend thereafter.
From 2000, the index reversed its course and began an upsurge,
peaking in 2004. However, the figure never exceeded 5 percent.
Beginning from the second half of 2005, a torpor was felt, dragging
the CPI downwards once again.
Based on these figures, Li said the conclusion that CPI will
continue to move upward is not fully justified.
Li noted that in a highly complex economy, CPI should not be the
only index used to observe commodity prices. According to him,
asset prices, mainly housing price and stock price, matter a
lot.
He explained that economic theories and experiences in different
countries have both validated the fact that when food and clothing
crises are solved and a generally well-off society has been
achieved, the CPI will enter a stable period, while asset prices,
wielding increasing influence on our daily lives, will witness big
rises.
Since the mid-90s, China has never experienced any noticeable
inflation and price fluctuations have kept steady at under 3
percent in recent years, according to Li.
"Actually, moderate and stable inflation is the best for an
economy," he said. "At a proper level, enterprises will be
stimulated to produce and invest and thus bring more jobs and
economic growth. In this way, people's income and living conditions
will be improved."
Explaining why serious inflation is unlikely to happen, Li
attributed the root cause to China having a larger savings volume
than its investment volume, meaning supply is larger than
demand.
Three factors are very important in this process: system reform,
science and technology progress and population structure change, Li
said.
He explained that system reform has freed productivity and
increased supplies. Meanwhile, science and technology progress
makes it possible to increase production while minimizing input and
population structure change combined with urbanization and
industrialization is the direct cause of high savings deposits.
However, China should not rest easy, Li warned, emphasizing that
more attention should be paid to the price volatility of stocks and
housing. He said price fluctuations in the asset market will
increase the possibility of fluctuation across the economy.
He cited Japan as an example. At the end of 1980s, the Japanese
CPI remained at a very low level, just like the current situation
in China. Off their guard, Japan's macro-control authorities
allowed housing and share prices to soar uncontrolled, seriously
impairing the nation's economic health and finally leading to an
overall decay of the Japanese economy.
He pointed out that although stock market bubbles have not
emerged in China, there have been many abnormal phenomena in its
real estate market and Chinese authorities should be on their
guard.
To ward off possible inflation, Li suggested the government to
address three problems: keep its policies stable and take a
cautious line in adopting wide-sweeping macro-control measures;
accelerate system reform, including tackling monopolies, government
administration systems and income distribution systems; and
speeding up structural reform.
(China.org.cn by Yuan Fang, September 19, 2006)