On the perspective of China's current inflation

Abstract: Based on the environment after the financial crisis, China is widely expected to face short-term situation of moderate inflation, the market did not follow the expected direction, in recent years the accumulation of overheating pressures gradually showing, macroEconomic data show China is facing a large inflation risk. the macro-control policies were introduced, but the effect is not yet clear. This paper analyzes the specific causes of inflation, and propose solutions to the current round of inflation control program.

Keywords: mobility of macro-control inflation

In recent years, as China's rapid Economic development, increasing foreign exchange reserves, excess liquidity in China's economy a major issue. As China's economy and the globalization of financial markets to further deepen China's international environment is a global excess liquidity within the global expansion of hot money, rapid increases in asset prices, increasing inflationary pressures ... ... With the end of the financial crisis, China's economy further exacerbated the problem of excess liquidity, inflation has gradually become a constraint sustainable development of China's national Economic determinants of healthy one in the face of higher inflation pressures, the state has conducted a number of macro-control measures, but the current market trends, the effects are limited.

China from the second half of 2010, the momentum of this round of inflation is integrated, in which there is a demand driven component, the composition of international input, there is a structural component, as well as cost-push ingredients, many factors are the result has its own characteristics, "Chinese style" inflation below both the international and domestic causes of inflation, to be specific to this analysis.

First, the international environment is an important incentive for the current round of inflation
(A) the Fed's monetary policy of quantitative easing
(1) Federal Reserve to boost the real economy, reduce unemployment, to reverse the deflation, in the implementation of a total of $ 1.725 trillion in the first round of quantitative easing monetary policy, and on November 3, 2010 announced the implementation of the 600 billion dollars in the second round of quantitative easing monetary policy as the United States as a large open economy, the world plays an important role in Economic development. In a lot of liquidity into the international commodities trading, the dollar as the main world currencies in international Economic relations, global resource commodity prices is bound to be showing a gradual rising trend, and China, as crude oil and nonferrous metals, iron ore such importer, the basic recovery in global economic conditions, the demand for resource products will further increase China's domestic market will be directly affected, facing the raw materials imported inflation will be further intensified.

(2) the appreciation of the RMB against the U.S. dollar, will lead to further depreciation of the currency because of the world's major currencies against the U.S. dollar is basically a floating exchange rate, while the exchange rate of RMB against the U.S. dollar is relatively fixed, so the dollar will inevitably lead to other non-dollar currencies, thus will lead to other non-dollar currencies against RMB in China already face high M2/GDP the context of inflation expectations is bound to further aggravate the situation more and more obvious devaluation and the expected recovery of U.S. dollar liquidity the possibility of relatively low, the dollar devaluation will continue, China's inflation will move up a certain role.

(B) the world's major economies have joined the ranks of recovery of mobility
After the financial crisis, the economies are facing a situation of excess liquidity, are considering withdrawing from the world's economic stimulus program, gradually tightening monetary and fiscal policy, have to raise interest rates, raising the deposit reserve ratio recovery of mobility, the same period, China's deposit and loan interest rates, deposit reserve rate lower than some large economies, if China does not withdraw from the economic stimulus plan or recovery of mobility, too late, excess liquidity crisis caused by inflation occurs in China.

(C) the excess liquidity in the international imported directly increase domestic inflation pressures, while also increasing the country's capital in developing countries and other emerging market bubble
As China's economic openness to further deepen with the world economy is a unified organism. New path of development in developing countries has great similarity and commonality, to further deepen the links between each other, the rapid accumulation of capital market bubble, the further increasing inflation expectations, while emerging and developing countries, is bound to give long-term development of China's economy has brought greater uncertainty.

(D) the influx of international hot money
With the deepening of China's reform and openness, economic development in good shape, has good potential for international investment, which will attract the attention of international investors, international hot money poured in, fueling inflation played a role.

(E) a fixed exchange rate
China's production of commodity exports to the United States, every $ 1 we must follow the export exchange rate is approximately 1:7 to balance the additional seven yuan exchange rate, China's foreign exchange reserves of about $ 2.3 trillion, in other words, in order to maintain a fixed exchange rate would have domestic issuance of RMB 16 trillion, equivalent to 3.4 trillion in 2008 M0 (notes and coins) is nearly five times the export settlement to put money all the way inflation is passed on ordinary people. Furthermore, the production of goods exported to foreign countries (Note: to reduce the domestic supply, export of goods in exchange for dollars in the form of debt has also been lent abroad, only the issuance of this stay in the domestic market, the yuan, constantly dilute the purchasing power of consumers.

Second, domestic factors are the main reason for the current round of inflation
(A) the continued high proportion of M2/GDP
As the economy continues to grow and gradually establish a modern banking system, the rapid rise in China's M2/GDP in
M2 size of over-expansion, means that over-investment, lack of effective demand, the proliferation of funds tend to invest in product markets, as a country seeing the emergence of asset bubbles and the direct cause of inflation in major economies, only China and Japan, M2 / GDP is greater than 1, that is, only two countries GDP below its broad money supply in the absence of a good financial markets to absorb the situation, over the M2 amount invested will result in overheating of the situation, the formation of inflation.

(B) the financial crisis environment, monetary policy and fiscal policy the lag effect
National financial crisis environment, in order to stimulate the economy to loose monetary policy and fiscal policy, macro-control results will be very apparent need for a time period in the crisis environment, the country's four trillion bailout plan to add the currency issue, the banks scrambling The amount of credit (nearly 10 trillion size of the highest level in history in 2007, nearly three times all further increase the market liquidity, although part of the financial crisis played a large role, but due to the macroeconomic duration of action and role of policy outcomes is not entirely predictable, the lag may be of this excess liquidity bear some responsibility.

(C) the consumption structure of the irrational (this has a clear structural inflation inflation
China's current inflation is mainly important and critical agricultural production or the price of daily necessities, such as in January 2011 food prices rose 10.3%, contributed to 64.1% CPI increase, inflation has become the largest round of hand-propelled . the current round of inflation, housing prices is another important manifestation of upward .2010 China housing prices rose 4.5%, CPI up 3.3% for the year to provide 22% of the support this year CPI to live up 4.22 percentage points the proportion of class , its CPI rise driven by the pressure can not be overlooked.

PPI on PPI rose Adds hidden .1 level has reached 6.6%, increasing growth in each category, although the field of industrial consumer goods transfer to take some time, but continued to rise in PPI inflation for the grim situation lay hidden (because of the rise in PPI shows the cost of further increases, which will further stimulate the CPI rise.

(D) the rising cost is an important reason for the current round of inflation
With the further rapid development of China's economy, market demand, and short-term use of limited resources can determine the costs of increased human resource costs increase, land prices rise, prices of raw materials and intermediate products of a number of increased agricultural prices, has emerged as a cost-push inflationary pressures.

Third, through the above analysis shows that China's current inflation is the result of many factors working together, with its own characteristics, "Chinese style" inflation, so the current round of inflation control measures should be taken more comprehensive
(A) the stability of inflation expectations
As long as the money flow to return to a reasonable level, people's inflation expectations will gradually stabilize, but it requires the joint efforts of all sectors of society. As for corporate earnings, and its importance must not, under the stable inflation expectations if the enterprises, especially increasingly difficult to find financing for SMEs, increasing labor costs, exchange rates and unstable, difficult to assess market prospects, the investor confidence will decline, not optimistic about the outlook for corporate profits, employment issues will be highlighted, which harm the economy is self-evident. Links to free download http://www.hi138.com (b) control to adjust the current round of inflation to moderate levels of supply and demand and consumer bodies
Producer price index reflects the price level of production processes, CPI reflects spending is the price level, the overall price level fluctuations will normally appear in the production area, then spread to the downstream industry chain, and finally comes to consumer goods in recent years, With over 10% of GDP for five consecutive years of rate increases, the excessive growth of fixed asset investment, we can say, no matter which side, demand is very strong, a lot of problems in the supply situation (international bulk energy prices, labor the rising cost of resources, land prices, agricultural prices and increasing the supply and demand do not adjust in the case, inflation is almost bound to the (market supply and demand theory, when in short supply, prices will rise, while based on market principles of supply and demand , to guide people to make reasonable adjustments to the consumption structure, increase the supply of larger alternatives, the consumer, to reduce the unreasonable demand of products purchased.

(C) the utilization of a variety of macro-control measures
Renowned economist Li Yining said, "The demand-pull inflation, tightening policy is effective; for cost-push inflation, tightening of macro policy is invalid. Macro-tightening policy can not solve the shortage of raw materials, can not solve the problem of rising prices of agricultural products , nor can the problem of rising labor costs eliminated. austerity policies may have on housing prices, land prices have a certain inhibitory effect, but since has risen, the total cost is still driving the price increases, which is we need attention the problem. "China's current inflation is caused by many reasons, it should be monetary policy, fiscal policy and other joint use.

Management of inflation expectations key to control liquidity. To really return to the current monetary policy "appropriate" monetary policy to further enhance the relevance and flexibility, the central bank should adopt a tight monetary policy can be specific:
(1) raise interest rates: higher interest rates is a relatively effective and rapid means to play a role, but the role of interest rate adjustment must have two conditions: First, the nominal interest rate of not less than the inflation rate, the second is micro-behavior of changes in interest rates to be able to make a more sensitive response. The disadvantage of raising interest rates while interest rates are too high influx of international hot money easily, resulting in a fixed exchange rate policy may have more damage, so need a better regulatory system and a more mature domestic financial markets to digest.

(2) raise the statutory deposit reserve ratio, the rediscount rate and open market operations: The main banks are reducing the use of credit funds, the risk of inhibiting the production of foam, but the disadvantage is that the inhibition of the scale of investment, may further lead to a shortage of market situation.

Fiscal policy, mainly by controlling the impact of revenue and expenditure of social consumption and total investment, in order to achieve steady economic growth of society, in the context of inflation, the government should take "to act against the economic winds," the tightening of the mediation fiscal policy on the one hand, to increase the tax policy, reducing disposable income members of society, thereby limiting the consumption and reduce investment, on the other hand, has taken to reduce government spending policies to compression members of the community's disposable income, thereby reducing the consumption, restrictions on investment the same time, policy co-ordination should be adjusted by income, and thus inflation.

In summary, government macro-control should be integrated use of various means to widely use of fiscal policy, monetary policy in the main to increase the statutory reserve ratio, the rediscount rate and open market operations-based, where appropriate, the means used to raise interest rates .

(D) increase the floating range of RMB exchange rate
Appropriate to speed up pace of yuan appreciation to reduce inflationary pressure on the international transfer of long-term perspective, a country's economic growth, the inevitable appreciation of its real exchange rate, which is an inevitable law. The real exchange rate appreciation in two ways. First, the nominal exchange rate appreciation, Another is realized in the form of inflation, while real exchange rate is the nominal exchange rate adjusted by inflation, exchange rate, so if not the nominal exchange rate appreciation will have inflation, if it is to curb inflation, you have to let the nominal exchange rate appreciation . RMB appreciation not only of inflation is good for our country's international purchasing power of money to enhance the role is obvious the same time, additional money and goods can be solved to increase the separation between the contradictions.

(E) is the fundamental transformation of economic development
Economic development is a country or region to achieve its economic growth, optimizing the economic structure and economic quality improvement methods and models. Both economic growth, including industry structure, demand structure and consumption structure of structural optimization and quality of economic development coordinated and sustainable. the current round of inflation, highlighting China's economic development over-relying on a single or a number of industries, unbalanced development between different industries, so as soon as possible fundamental change in governance of China's economic development model, taking a new path of development, from the simple labor-intensive and high consumption and low efficiency of the development model to the efficiency of capital-intensive business development, greatly improve the ability of China's financial markets to digest, hot money to open up for private investment in the real economy channels.


References:
[1] Lang, China's low wages and high prices secret. Youth Digest, 2011; 5
[2] Chen Jingsi, Li Yining. Austerity policy can not cure the cost of inflation, the Oriental Morning Post
[3] Gao Hongye, the Western Economics (fourth edition Beijing: China Renmin University Press, 2007
[4] to the song Jo. Rates of excess global liquidity crisis causes and consequences, Beijing, Peking University Press, 2007 Links to free download http://www.hi138.com