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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)