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China Inflation Essay

In recent years, China has met price of commodities rising quickly, inflation has affecting the overall economy. In this article, I will analyses last five years status of China inflation, explain the cause and effects, then base on the cause and effects, giving some solution to deal with the inflation.

According to the definition of economics, inflation refers to the number of currency in circulation more than economic operation needed, and then cause currency devaluation and a persistently rising price level. In order to precisely explain inflation in China, I selected last five years inflation rate to analyze the overall condition about China inflation.

Inflation rate,

The following chart shows last five years inflation rate and trend of change.

* In these chart, we can clearly see that, after 2008 years high inflation rate, inflation rate has fallen during the 5 years. But the size is not big. Since 2009, the inflation rate was going a new round of the rising trend. On the surface, china inflation is not so high, but some of the industry’s price rising greatly, such as agricultural products and real estate industry. And during last thirty years, overall commodity price in china has kept rising quickly. So China inflation is still a serious problem.

The cause of China inflation

Demand-pull inflation

The inflation because of aggregate demand excessive increase is called demand-pull inflation. In order to deal with the financial crisis in 2008, to speed up the pace of economic growth in China, the central government carried out 4 trillion RMB investments and a series of stimulate measures to expand domestic demand. In China, the fixed assets investment increased 30 %( compared to 2008 ),the amount of fixed assets investment is 22.46 trillion RMB in 2009( 65.9% in annual GDP ) and 27.81 trillion RMB in 2010( 69.8% in annual GDP ). Depends on the huge number of investment and loans, China economic recovered faster in the world, on the other hand some area assumes the extension expansion, break the balance of economic structure, has formed a serious pressure of inflation. Unhealthy investment is other problem in demand-pull inflation.

Cost-push inflation

1. Employee wages rising

Wage growth makes the production cost growth, on given price levels, the profit level of manufacturer will decrease, manufacturers willing and are able to supply the number of products will decrease, so that the aggregate supply curve shift to left, is caused the price level increase. In 2008 and 2009, the average worker real wages indexes increase from the previous year were 11% and 13%. Over the same period, the GDP growth rates were 9.6% and 9.2% respectively. Worker average wage index rising more than the GDP growth rate of the same period. Wage growth has led the production costs and the total price level increase.

2. Inflation triggered by the rising prices of raw materials In China, after the financial crisis of 2008, the huge investment in fixed assets need a great number of raw material such as steel, wood and cement to support it. The phenomenon of demand greater than supply causes the rising price of wood, cement and steel. That is the beginning of comprehensive price rising.

Imported inflation

In May 2011, the middle rate between RMB and us dollar break 6.5. China external dependence is relatively large, the decrease in us dollar will transfer the influence to China. Because persistently rising price of international bulk commodity, the biggest importer and trade processing section—china, has suffered huge pressure in cost growth. On the other hand, china is a biggest importer in oil, mineral, food. So when the price of these goods increase significantly, at the same time, through the imported channel affect the general price level in China, leading the imported inflation.

In recent years, because of the good investment prospect and appreciation expectations of RMB, also result in a number of unknown money inflows to China, the hot money inflow to China will cause short-term speculation behavior in capital market and real estate market. In china, the regulation system in this area is not sufficient enough, supervision is relatively difficult, and also cause imported inflation in this reason.

The effect of inflation in China

(1) The influence on economic growth.

1.1 The error of resources guide.
When inflation happened, because the destruct to the currency force the price system disorders, upset the market mechanism, to interfere with the market signals and make the transfer of market signal distortion, cause the allocation of resources disorders, reduce economic efficiency and economic instability.

1.2 Effect on labor force.
Inflation caused part of the false demand, and disturbing prices and wages system, give the labor many wrong information, they were attracted in some temporary jobs. And once inflation over, or when it is no longer increased enough, these jobs will disappear, and will cause the new unemployment.

1.3 Affects China export product competitiveness.
At present China employee’s wages in the big scale of rising, this year in the coastal areas, appear a shortage of 6 million migrant workers, and in coastal areas, average wage rise 15%-20% to rural migrant workers, and this already transfer from a manufacturing economy to a service industry quickly, and the present China industry majority is labor intensive, and also because the status of “world factory”, low labor costs is a advantage, low wages low price in accordance with China’s interests upgrade transformation haven’t succeeded, it’s to early into high wage upscale stage, the product export will not competitive, other Asian countries will replace the situation of china in market. Inflation will make higher labor costs; increase the difficulty to Chinese products export.

1.4 Brings huge uncertainty to investment and consumption.
In inflation, a kind of commodity price increase is not the real increase due to market demand rising, and just because the speculative impulse or panic of consumers, producers about prices rise further caused. Because not every one of the producers can handle the overall market information, so this kind of speculation from the uncertainty and panic is likely to promote the further investment, at same time consumption has become more chaos. (2) The influence of the development of society

Inflation influence on the society mainly displays in the national income redistribution, because it changed the income and wealth possession ratio of original members of the society.

2.1 Low-income families are the biggest victims of inflation. On the one hand, because food prices is the mainstay of this round of inflation, and the lower income families has higher Engel’s coefficient, the damage of food prices rising is deep. On the other hand, because low-income families’ consumption in the larger proportion in income holds, marginal propensity is large, is given priority to the necessities of life, this part of the consumer goods often lack of the price elasticity. So, low-income can’t through maintain and increase assets’ value to against inflation.

2.2 This round of inflation come with asset price (such as stock and property) expanded rapidly, and expand the income distribution gap, increase the unfair feeling to low-income people, at the same time, stimulates the enthusiasm to inhabitants of all kinds of assets investment, this investment enthusiasm lead asset prices to rise further, make capital market systemic risk are gathered together.

3.3 Inflation impact social member’s wealth possession ratio. In inflation, physical assets value added much higher than the rate of inflation, so holder can benefit. Conversely, inevitable damaged. If the holders hold deposit money, they suffered loss because of rising prices and decrease in currencies; if the holders hold securities, and then depend on rate between rising prices and stock price changes. Liabilities members of society reduce the actual debt burden. The government and the enterprise are in the net debt position, is beneficiaries in inflation. And residents in a net creditor position, inflation are victim in inflation.

How to manage the inflation in China

(1) Build a correct understanding of the essence of inflation; attach importance to the management of currency

First of all, should control the issuance of the currency amount from the source, keep balance between money supply and economic development needs. For the currency issue institutions, regulating the procedures, shows the clear responsibility, avoid excessive issued. Second, the government should adopt agile monetary policy. According to the actual economic operation, make use monetary policy efficiently, and try to improve the purchasing power of the money, ease monetary inflation pressure.

At the right time, raise the deposit reserve rate and raising interest rates, issue Treasury bonds, open market operations to control money supply amount. The purpose is keep the balance of aggregate supply and aggregate demand basically, maintain price stability and full employment. Since January 2010, China has continued to adjust deposit reserve rate in 12 times, percentage of large financial institutions increased to 21.5% from 15.50%, small and medium sized financial institutions has been increased to 18% from 13.50%. This activity shrunk the liquidity to a certain extent.

(2) Establish corresponding early warning mechanism

Direct response of inflation is the commodities prices continue to rise. The effect of the monetary policy exist certain hysteresis. If began implement monetary policy after the price rise sharply, it need a period of time to produce the result. That may ease economic fluctuations, but that may produce bad influence to the volatility of the economy too. As far as possible to avoid a control too much, or couldn’t control the situation. So, to the macroeconomic regulation, need to establish the corresponding early warning mechanism, it also requires money management authorities to improve the management level, avoid it before obvious inflation, they should take corresponding measures to avoid economic fluctuations.

(3) Adjust foreign exchange policy and keep balance of international payments

At present our country executes is mandatory settlement and sale of foreign exchange policy is restrictions. Because of the foreign exchange income of export enterprises must be sold to foreign exchange bank. If foreign exchange is constant, in a floating exchange rate, foreign exchange bank of sell excess foreign currency can lead to exchange rate fall. But China want to keep the stable of exchange rate, forced the central bank to buy a large foreign exchange, in order to maintain the stability of RMB exchange rate. This will form empty demand increase for foreign exchange, increase the investment of the monetary, the base currency produce the multiplier effect, which eventually led to the money supply increased.

We can gradually allow Banks to foreign exchange transactions, let the foreign exchange market shunt RMB financing, establish foreign exchange reserve fund, carry out foreign exchange transaction. We can choose some management regulations of the financial management, sound enterprise, allowing him to open a foreign exchange account, to keep foreign exchange funds. keep the balance of international payments; change the trade surplus of excessive situation. By simplifying the import formalities and reduce tariffs, etc way, encourage imports, especially the raw material of the block of domestic scarce import, forming materials reserve, timely bring prices down. (1828 words)

Reference
Bregger J.E (2009) China Inflation rate’s chart. “National Bureau of Statistics of China”. From: http://www.tradingeconomics.com/china/inflation-cpi 6 JULY IMF, China; International Monetary Fund China inflation rate’s chart (2012) from: http://www.statista.com/statistics/167115/inflation-in-china/ 6 July 6, 2012 Historic inflation China – CPI inflation (2012) from : http://www.inflation.eu/inflation-rates/china/historic-inflation/cpi-inflation-china.aspx 6 JULY Jain T .R (2006) Microeconomics and Basic Mathematics. New Delhi: VK Publication, Jan 2001 Wang X.Q (2002) Population Dividend Effects and china’s economic growth. March 6 , 2009


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