Putting the lid on inflation

Since 2009, when different local governments began to raise their minimum wage standards, labor costs in parts of the country have increased by more than 20 percent, which, together with the rising prices of resources and growing distribution costs, has contributed to the recent price rises for domestic agricultural products.

China should regard stabilizing the current price level as its top priority this year. Besides necessary measures to increase and guarantee supply and distribution and to tighten market supervision, the country should also put in place a series of middle- and long-term policy strategies to defuse inflation pressures.

The Chinese government has lowered its gross domestic product (GDP) growth target to 8 percent for the year 2011 and to 7 percent on average for the 12th Five-Year Plan (2011-2015) period. The lower economic growth target demonstrates the high degree of attention the government is paying to better balancing the country's economic growth and inflation and to improving the quality and efficiency of its economic growth.

However, local governments are expected to have unprecedented enthusiasm for investment as a means of raising their political performance. This move, if not effectively curbed, will likely add to the nation's inflation pressures. Thus, China should take some pre-emptive measures to curb such an investment impulse in a bid to create favorable conditions for a soft landing of its economy.

Also the management of liquidity should be tightened to undercut the monetary factors behind the country's latest round of inflation pressures. China should further reduce its credit scale, which rocketed following its adoption of a series of large-scale stimulus packages aimed at easing the impact of the global financial crisis.

At the same time, effective measures should be taken to stop the continuous inflow of international hot money. As a move toward this end, the country should pay attention to imports and try to strike a balance in its international payments.

To acquire sustainable and rapid economic growth, China should also further deepen its pricing reforms and expedite the transformation of its long-controversial extensive development mode that is heavily dependent on simple investment expansion in a bid to form a market-based resources pricing mechanism.

Considering that price rises remain a long-term irreversible tendency, the government should refrain from excessive administrative intervention into the current management of inflation pressures, a move that could result in the distorting of prices and cause the market to fail to play its role.

The author is a researcher with the Institute of Economics under the Chinese Academy of Social Sciences.

(China Daily 05/24/2011 page8)

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