Yi Xianrong
Recent figures released by the National Bureau of Statistics
show the country's consumer price index (CPI) rose 3.2 percent in
the first half of the year, and increased 4.4 percent in June.
Hikes to food prices largely powered the bulging CPI, while
prices of manufactured goods and services remained stable.
In view of this, no overall price rises are expected if
everything is handled properly. However, if the food price
increases fail to be brought under control and are compounded by
quickly rising real estate prices, the CPI could go up sharply.
Some, following the lines of developed nations' practice, argue
that the CPI is staying basically stable, judging from the core
CPI, which excludes food and energy costs.
People of this school of thought ignore the fact that there is a
wide gap between the Chinese CPI system and that of developed
market economies. It has no real meaning that they gauge the
Chinese reality with experiences gained in the developed world.
The Chinese CPI consists of eight primary components covering
food, clothing, home facilities, services, healthcare,
transportation, communications, entertainment, education and
housing.
The weight of food accounts for 34 percent of the CPI, while
entertainment, education and stationary account for 14 percent,
housing 13 percent, transportation and communications 10 percent,
healthcare 10 percent, clothing 9 percent, home facilities and
their maintenance 6 percent and wine, cigarettes and daily-use
articles 4 percent.
The US CPI system, however, is weighted differently. Housing,
for example, accounts for 42.1 percent, food and drinks 15.4 per
cent, transportation 16.9 percent, medicare 6.1 percent, clothing 4
percent, entertainment 5.8 percent, education 5.9 percent and other
commodities and services 3.8 percent.
Apart from the different weight of CPI components, the
definition and revision of the weights of commodities and services
in the Chinese CPI are not conducted in a transparent way. In
contrast, the weights of commodities and services in the US CPI,
are defined on the basis of surveys on the spending of millions of
households over the last couple of years. Moreover, these weights
are revised every other year so that they keep up with changes in
consumer tastes and preferences.
In China, the system of drawing up the CPI was introduced as
early as the 1950s during the planned-economy era. As a result, the
data and experience gained during this period are largely
disconnected from those gained after the late 1970s when the
country embarked on the road of reform and opening up.
Moreover, profound changes have taken place in the country's
economic set-up and climate over the last three decades. In this
context, the CPI draw-up trails new developments - and its accuracy
is questionable.
The current CPI calculation is based on the calculation system
of the national economy in 1993. This explains why spending on
education, healthcare, housing, communications and transportation,
which constitute very large portions of Chinese consumers'
expenses, fail to be fully reflected in CPI.
A CPI that is unable to accurately mirror people's consumption,
therefore, offers an inaccurate interpretation of the country's
economic life and is also prone to leading the government,
enterprises and ordinary households to erroneous decisions.
This writer believes many domestic economic problems have their
roots in the low-interest policy. This finds expression in a number
of phenomena.
First, the banks' interest rate is lower than that of the
non-governmental credit market.
Second, the interest-rate level of the country is very much
disengaged from the nominal GDP growth.
Third, the United States and China both started raising interest
rates in 2004, with the Fed having increased the interest rate 17
times so far, but the People's Bank of China having raised the rate
merely five and a half times. This should be considered against the
fact that the Chinese economy is growing several times faster than
the US economy.
Fourth, the domestic banks' interest-rate level is widely
dislocated from the high investment-return rate. Chinese
enterprises' profits rate, for example, currently stands as high as
20 percent, thanks to the booming Chinese economy, and the real
estate sector sees particularly higher profits rate.
In view of all this, a conclusion can be drawn: It is simply
impossible to have various kinds of distorted economic behaviors
corrected if the current low-interest policy remains unchanged.
The modern-day central-bank working mechanism emphasizes
foresightedness, rather than merely working out monetary policies
according to the latest economic data. And the data for reference
should not be exclusively confined to CPI and they should also
include fluctuations of assets' prices. Moreover, some economic
data is disconnected from the economic reality.
In short, it is high time that the nation's CPI system be
restructured. It can be said that the end of the old CPI system
means the end of high growth speed and low inflation.
The author is a researcher with the Institute of Finance and
Banking at the Chinese Academy of Social Sciences
(China Daily August 10, 2007)
