China and inflation have not co-existed well over the centuries.
China is attempting to do the impossible, walk a tightrope between free markets and strong central control. Ultimately the two don’t play well together. In the end, they are incompatible. In the meantime, however, the drama of an enormous population with expectations of rising standards of living and a centrally planned economy try to co-exist. The resolution of this conflict could be quick (very dangerous) or play out over decades (presumably a better outcome).
Compounding the task is currently rising inflation. From Coffeetoday comes this quote from Chinese Prime Minister Wen Jiabao:
“I think with our efforts we can keep prices at reasonable levels. As leader of the Government, I have the responsibility and I have confidence (for it),” Wen said. The People’s Bank of China (PBOC, Central) announced yesterday an increase of a quarter point interests rate, the second of its kind issued by China in just two months. ”We raised the bank reserve ratio on six consecutive occasions and increased interest rates in two to absorb excess liquidity in the market to maintain a reasonable level to support economic development,” said the premier.
In November inflation reached 5.1 percent, the highest figure in 28 months. The Prime Minister, in his best Ben Bernanke imitation, insists that inflation can be managed:
“I think with our efforts we can keep prices at reasonable levels. As leader of the Government, I have the responsibility and I have confidence (for it),” Wen said. The People’s Bank of China (PBOC, Central) announced yesterday an increase of a quarter point interests rate, the second of its kind issued by China in just two months. ”We raised the bank reserve ratio on six consecutive occasions and increased interest rates in two to absorb excess liquidity in the market to maintain a reasonable level to support economic development,” said the premier.
Real estate prices are suspected to be in a bubble in some of the major cities where price rises have exceeded double digits for months.
In an attempt to bring China into the 21st Century, the Chinese government is betting that they can stimulate and then put on the brakes when inflation appears.
I believe they are wrong. If so, there could be serious implications within and outside of China.
There are other forces also at work in China, not the least of which is demographics. The one child policy will yield a bitter harvest as the population begins to age very quickly and very significantly within the next two decades.
As a nation, Chian has always struggled to maintain control of its nation and has been beset by internal strife and violence on many occasions. One has to hope that such an outcome is prevented.