Chen Zhiwu, a professor of finance at the Yale University School of Management and an eminent economist, told Xinhua his views on the recent food and energy price hikes in China.
China is getting a bum rap
Xinhua: Recently some consumer products prices have been surging in China and other countries. This has triggered fears about a looming "global inflation era". Some people believe China is to blame for this; what is your take on it?
Chen Zhiwu: I think such fears are overblown. It is also groundless to say that China is now exporting inflation, rather than deflation, to the rest of the world. In fact, the global market has not seen such an obvious upturn in manufactured goods prices overall. That is because the world still has spare productive capacity. There is a labor surplus in the emerging markets. All these factors will curb the rise in prices of manufactured goods. In this sense, China will continue to play a positive role in stabilizing consumer goods prices and holding down global inflation.
Xinhua: Agricultural products and other commodity prices, metals and energy prices in particular, are going up even more sharply compared to manufactured goods. What has caused this price jump?
Chen Zhiwu: Mainly it resulted from growing demands and tight supplies. The recent fever over bio-fuels has driven up agricultural product prices. With skyrocketing oil prices, some countries began to adopt alternative energy strategies. Corn, a key raw material for bio-fuels, suddenly became extremely precious and stimulated the price upsurge of all agricultural products. But products such as corn can be very easily reproduced; a persistent price hike is highly unlikely.
Compared with agricultural products, iron ore, nonferrous metals, oil and other commodities are non-renewable resources with limited reserves and supplies. Price pressures on these commodities have been around for years and will continue for years to come. On the demand front, the insatiable appetites of China, India and other emerging economies have been pushing up crude oil prices globally.
However, I do not think we need to be over-concerned about the future. History told us that capital and human resources would pour into the development of alternative solutions when a commodity's price has risen to a certain level. As a result, cheaper and better alternative products or technologies will emerge.
Let the 'invisible hand' play its role
Xinhua: What should the government do in the face of record consumer goods prices?
Chen Zhiwu: The market economy has scaled considerable heights in today's China. This has weakened the government's grip on the market. If the government goes against the market rules and tries to stabilize prices through administrative measures, even more problems will surface.
In fact, it is useless to worry too much about inflation. Small-scale inflation is inevitable during any sustained growth period. Its damage on the economy is very limited if is kept under control.
Xinhua: What else can the government do aside from reducing intervention?
Chen Zhiwu: Market mechanisms could play a bigger role in agriculture. The government has introduced futures for some agricultural products and I think there should be more. China could have pork futures, for example. Future contracts could be used to lock in manufacturers' profits. They also reduce market risks, guarantee supply and stabilize prices. Many developed countries use them.
In terms of energy, the government should work harder to cut down energy consumption and look for energy alternatives such as solar, wind, and atomic.
Everyone has a stake
Xinhua: What lessons can China draw from the US sub-prime loan crisis?
Chen Zhiwu: We can learn a lot from this credit crisis. The most important lesson is that every country is heavily influenced by what is happening overseas. With increasing integration of the world's economies, it is impossible to remain a bystander.
It was not the Federal Reserve, but the European Central Bank and the Japanese Central Bank - they first took action right after the crisis. The European Central Bank alone has pumped 94.8 billion euros into the euro-zone banking market. One country's economic risks could translate into global risks. That is why it would be a lot easier if different nations joined hands and tackled problems together.
(china.org.cn September 2, 2007)
