China is back to Lehman Brothers quo ante. As in early 2008, before the failure of the US investment bank triggered a global financial crisis, there is concern that China’s economy is growing too fast. Credit is expanding rapidly, there are signs of asset bubbles everywhere, and consumer price inflation is threatening to hurt ordinary people.
Recent figures show that, in February, consumer prices rose 2.7 per cent over the previous year, close to the 3 per cent unofficial target. Given the massive increase in money supply last year, there is a danger of inflation getting out of hand. To think otherwise would be to argue that China’s underlying economy remains weak. True, there are questions about how the economy would fare without government stimulus. Yet industrial production looks robust – up about a fifth in both January and February. What is more, there is little sign of manufacturing oversupply. Far from it: in February, factory prices rose 5.4 per cent. Wen Jiabao, China’s premier, yesterday conceded that inflation posed a threat to social stability.
To be fair, the Chinese authorities have often been more skilful than their western counterparts in balancing growth with price control. This year already, authorities have raised the bank reserve requirement twice and increased the required down payment on land purchases. But such tinkering, effective though it sometimes is, may no longer be enough. One reason is that stimulus money is leaking into the economy. Too much liquidity is chasing too few assets. More structurally, it looks like China’s seemingly endless supply of young, cheap labour is coming to an end. China’s population will begin to age from 2015. Factories in places like Guangdong are fighting to attract workers. The upshot is wage inflation.
What can Beijing do? One option is to raise interest rates. It is an increasingly safe bet that the central bank will move rates up a notch before the end of the second quarter. The second is to let the renminbi appreciate again after a 20-month pause. Mr Wen yesterday said foreign demands for a revaluation amounted to protectionism. But China does not need to revalue to please Washington. It should do so to further its own stated goals of boosting consumption and the domestic economy. A revaluation, though no panacea, would also help fight inflation by making imports cheaper. It is in China’s own interest to begin a modest appreciation. The stirring of inflation provides the perfect excuse.
