Chinese inflation

Posted: November 27th, 2013

Chinese Inflation

The rate of inflation in China has continually grown into a creeping state over the years as noted by Chou (1963) in his inflation research. For instance, in April 2011 it was indicated to be at the level of 5.3 percent. From 1993 until 2009, the average rate of inflation in China was 4.20 percent thus marking an historical record of 27.69 percent. In addition, “the rate was noted to have reduced to negative 2.20 percent of which it was actually a low status of economy” (Allen, 1999, pp. 47). Thus, the rate of inflation refers to a gradual increase in prices measured alongside a normal level of purchasing command of the consumers.

There are many causes of inflation in China due to the existence of numerous economic activities in the country. Therefore, many problems in the China market are because of the high rate of inflation that is being experienced. The first cause of inflation is related to the demand of commodities. In China, the rate of population growth is high just as in India thus many people require many commodities to satisfy the huge population. This is with close connection to the fact that human needs are unlimited; thus, each sector of the economy is demanding a portion of the market products. The law of demand states that “as the price of commodities goes down, the demand for the commodity increase” (Case, 1981, pp. 81). In addition, as the price increases, the demand for the commodities in the market decreases. However, this does not apply efficiently in the regions where there is high population of people for they have different financial backgrounds. This comes with the information that in China, the gap between the poor and the rich is not wide spread thus making the population capable of living an average life style.

The law of supply states that, “as the demand for commodities increase, the suppliers will increase the price” (Samuelson, 2008, pp. 164). This does not have effects on the fundamental commodities in which the consumer cannot live without them (necessity goods). The demand for the compulsory goods in the market is not affected by the changes in the price. Therefore, they maintain perfect inelastic supply curve. “The high rate of inflation in China has been caused by the high demand of commodities which sequentially result to an increase in the price of commodities” (Jones and Pegram, 1945, pp. 297). Therefore, the demand mechanism determines the price of commodities with the influence of the total population. As the population in China continues to increase, there is also increase in demand for commodities and hence the suppliers have the tendency of increasing the price of commodities.

The government of China is not committed in regulating the prices in the market hence they have allowed the price of commodities to be determined by the action of demand and supply. In this situation, the consumer is exploited by the greedy supplier whose main motive is to increase his profit margins. The government of China has not influenced the market through imposing control in the economic activities performed by different proprietors in the market.

The other factor concerns the depreciating factor of the current currency of China. This comes with an effect whereby the government prints money and consequently depreciates its value such that there is accumulation of currency in the circulation, which does not have worth.

In this case, a commodity that could be bought with one dollar is then increased in price thus being bought at ten dollars. Mostly, printing of a lot of currency and exposing the same currency in the financial market has an influence of lowering the value of currency as compared to currencies of other countries. Therefore, “distributing a lot of currency has an effect of making the currency to depreciate hence leading to high prices of the commodities” (Kaaresvirta and Mehrotra, 2008, pp. 296). This reduces the purchasing power of the consumer hence making China people not to be able to purchase goods and services comfortably. With reference to the gap between the rich and the poor, the rich would enjoy this situation because their income has been increased while the less fortunate in the society will not enjoy because they shall feel exploited.

In order to reduce this high rate of inflation, the government of China should find a way of controlling the price through the most appropriate way thus not disturbing market arrangement. One of the methods is for the government to subsidize the prices. “The government of China should meet some expenses incurred during the production of commodities and hence the cost of production will be reduced” (Case, 1981, pp. 391). The effect that is caused by reduced cost of production is related to reduction in the prices of commodities. This activity of the government reduces the cost of production and hence the supplier is entailed to make his commodities affordable through reducing the prices of each commodity. The other factor that the Chinese government should look into is the tax benefit. “Tax has the ability to influence the price of a commodity for it facilitates the collection of revenue” (Feyzioglu and Willard, 2006, pp. 82). Therefore, for the government of China to reduce the price of commodities, it should consider to reduce the level of taxation in order lower the prices of commodities. In addition, the introduction of tax holiday should be introduced in order to cater for the reduction of the price.

The government of China should also sell its securities that include the treasury bills and bonds. The action of the government selling its securities is supposed to reduce the currency accumulation in the market. Hence, it does so by selling treasury bills to the public in order to control the circulation of currency. The China banks should “increase the rate of loan interest in order to discourage many people from acquiring loans from the banks” (Hart, 2010, pp. 304). This has an influence in reducing the circulation of currencies that result to inflation. The other monetary policy that is used by the banks to reduce circulation of more money is by increasing the minimum amount that an individual should keep with the bank. Therefore, through these methods, the government of China will reduce the high rate of inflation experienced in the economy.

References

ALLEN, L. (1999). Encyclopedia of money. Santa Barbara, CA, ABC-CLIO.

CASE, J. (1981). Understanding inflation. New York, Morrow.

CHOU, S.-H. (1963). The Chinese inflation, 1937-1949. New York, Columbia University Press.

FEYZIOGLU, T., WILLARD, L., & WILLARD, L. (2006). Does inflation in China affect the United States and Japan? Washington, International Monetary Fund, Asia and Pacific Dept.

HART, J. (2010). How inflation works. New York, Rosen Pub.

JONES, T. C., & PEGRAM, J. C. (1945). Letter to John C. Pegram, regarding Chinese inflation and Japanese economic resources. New York, Sage.

KAARESVIRTA, J., & MEHROTRA, A. (2008). Business surveys and inflation forecasting in China. Helsinki, Bank of Finland, Institute for Economies in Transition.

SAMUELSON, R. J. (2008). The great inflation and its aftermath: the past and future of American affluence. New York, Random House.