Events: Andy Xie: Inflation is too late to prevent further violent strikes fear
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Although price controls, inflation temporarily to calm public fears, but if you can not achieve the established objectives, fear violent strikes again
Inflation has been a threat to social stability. Followed by tight monetary and government control of prices combined with the corresponding pair. Although these measures may temporarily calm the public's inflation fears, but if you can not achieve the established objectives, the fear may again violently hit.
China has entered the era of inflation. The next five years, the average inflation rate depends mainly on the case of monetary expansion over the past decade. Now too late to try to stop inflation, you need to do is to protect the stability of the inflation era.
From deflation to inflation
China's economy prone to inflation. A large developing economies, the demand for money is everywhere, and economic system, often through monetary expansion to meet this need. This is why China is the frequency of high inflation.
As Milton Friedman • (Milton Friedman) said, inflation is a monetary phenomenon after all. The long term, this sentence is right. In the short term, inflation and currency relations will become complicated. In different situations, the impact of monetary expansion on inflation is different, economists generally believe that the velocity of money is a reference variable. In reality, this is not only concerned with the speed of money circulation. Currency or CPI tend to associated with the products and services.
1996 -2 004 years, China has experienced deflation rare. The reason is excess labor and natural resources (especially oil) prices low. Millions of state sector reform will be laid-off employees to the market. -70 50s of last century's "baby boom" has continued to impact on the labor market. The rural sector to improve the productivity of urban and rural labor into the industrial sector.
Despite the rapid growth of labor productivity, but wages remain stagnant while filling the remaining labor force, so general decline in prices of manufactured goods at home and abroad. Wal-Mart's success is the most prominent representative of this era.
However, the expansion of China's manufacturing industry was not brought inflation, thanks to cheap and growing international market prices of natural resources. Major reason is that 15 years after the disintegration of the Soviet Union, Central and Eastern Europe, Russia and Central Asia Soviet bloc economies, the declining resource requirements, off_set_ by increased demand in China.
If an economy is heading towards deflation, monetary expansion will not lead to inflation in the short term. As mentioned earlier, in the economies, the currency in circulation is slow. Moreover, this period of monetary flows to housing industry one-sided and did not enter with the CPI-related goods and services.
Around the year 2004 -2005, the situation changed. Chinese labor market has balance. Some industries, particularly export industries, labor shortages occur. As Russia and other former Soviet bloc economies, the demand began to rise in raw material prices began to rise. Labor and natural resources, market conditions began to favor inflation, that monetary expansion is likely to result in CPI inflation. This is why China in 2007, suffered a serious inflation problem. Government to raise interest rates to restore price controls to curb inflation.
Interrupted by the global financial crisis, China's inflation trend.
Many analysts hope to clear, inflation has never been any long lasting problems, due to excess capacity, China is still in deflation stage. This idea led to three years, a substantial increase in money supply by 78%. However, the shock of the financial crisis is only a temporary reduction in prices of natural resources, reducing the degree of inflation in China. In 2009, just a stable global situation, natural resources and labor prices continue to rise.
As China's economy on inflation put a lot of money, the current inflation problem is more serious than in 2007, will take years to resolve.
Endogenous or exogenous
Current inflation is a problem of exogenous or endogenous is still going on.
The formation of inflation is not in a day. Some people think that the Federal Reserve recently introduced a second round of the quantitative easing policy induced inflation in China. This interpretation is too naive. The Fed's policy had a chance to lead China's current inflation. Others say, from China can be seen in food prices, international prices and China's inflation has obvious relevance. This interpretation is not accurate. China's soybean imports increased by 25% than last year, this is the main reason for soybean prices.
Therefore, prices of Chinese goods can not be attributed to the international market, but if China's demand led to the international market prices, such judgments are reasonable.
It is important to the objectives of the struggle with inflation have a clear understanding. In a deflationary environment, a great as_set_ to attract speculative currency increment.
Even if the environment has come to be inflation, which continues to absorb the momentum of currency speculation. But because inflation expectations will eventually bring about tighter monetary as_set_s will inevitably flee the market, thus promoting the CPI rise. Although you can guess how the money will be withdrawn from circulation, in fact, since 1930, no major economies to shrink the money supply. In addition, because of past monetary growth has spawned many investment projects, need to continue to maintain monetary growth operation of these projects. Therefore, inflation seems inevitable and may remain high for several consecutive years.
Five Strategies
Inflation does not mean instability. Many economies have experienced higher inflation, but economic growth did not stop. "Maintenance of stability," the necessary conditions for the next few years raised interest rates to a level comparable with the expected inflation. The next five years, China's CPI inflation rate is likely to average more than 5%. The deposit rate, at least short-term deposit rates raised to this level as soon as possible, is essential.
Otherwise, depositors can take money, hoarding of consumer goods. This will lead to inflation crisis. Priority to keep inflation stable, that is willing to continue to depositors in the bank deposits.
Market forces will wage, especially blue-collar wages rose faster than nominal GDP. However, local governments often use administrative power to suppress wages and business together. This is a huge mistake, because the wage increase is to rebalance the Chinese economy, to shift spending away from investment in the best way.
China's personal income tax has been high. This led to enterprises, especially private enterprises, the general increase in tax deductible expenses as much as possible, reducing taxable wages. The corporate income tax is 25%, while the top marginal personal income tax is 45%, which makes some people's personal income tax does not exceed 25%. However, employees of large companies usually pay the highest tax rate under the pressure of rising wage inflation, the burden of large enterprises will increase disproportionately. In addition, high rates of inflation greatly reduced the barriers to entry. Invasion of personal income tax structure of inflation, exacerbated the negative effects of inflation. Government should be the highest marginal tax rate to 25%, and corporate income tax rate unchanged, while income tax according to the inflation rate increased the threshold for each file.
Opposed to raising interest rates, believe that it will attract "hot money." I think not. Interest rates is not to attract "hot money" the only factors that may not be the main factor, especially in emerging economies. Ten years ago, the East Asian emerging economies, high interest rates attract foreign capital, but without success. Over the past few years, the same low interest rates and the economy does not need the implementation of foreign capital, but the "hot money" is still a flood. India's interest rates close to 10%, but not in China to attract "hot money" and more. "Hot money" should not be bound by China's rate hike.
U.S. monetary policy and domestic as_set_ market conditions to attract "hot money" the most important factor. Once the speculators to invest in emerging markets, they want to be able to have 100% within a few years the huge gains. This return can only occur in the bubble environment. U.S. loose monetary conditions in emerging markets is a necessary condition for the bubble, "hot money" will make it a reality. But the premise is that emerging economies must be very sensitive to the bubble game.
As long as the Government is determined to crack down on the bubble, no matter how much the Fed's loose monetary policy, no matter how enthusiastic speculators, this situation will not happen. When an emerging economy by raising interest rates to show resolve to squeeze the bubble, "hot money" will be pulled out. As the last of China unexpectedly raised interest rates, the renminbi offshore NDF market to decrease.
China's current inflation, and the similar situation in 1994: are long-term accumulation of monetary expansion, and expansion trend could not be stopped because all investment projects must have beginnings and ends.
Measures need to be taken now and in the past like, "maintenance of stability" policy is necessary to: (1) within the next five years the average inflation rate is expected to rise; (2) people living on fixed incomes (such as retirees and students) increase in benefits; (3) to allow market forces to determine wage growth; (4) reduce the personal income tax.
The author is director of Ro_set_ta Stone Advisors, economists |
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