Macro View

Back to the balancing act

  • Published 29 Oct 2009

Inflation, inflation, inflation. We predicted in July that it would return in Q4 or early in 2010 and, right on cue, it looks as if China is re-entering an inflationary phase. But how worried should we be?

First, the good news. Moderate and controlled inflation is seen by Beijing policymakers as broadly a good thing as it tends to spur consumer spending and erodes the burden of debt over time. Thus, if a rise in the Consumer Price Index (CPI) during 2010 can be kept well within 5% year-on-year, policymakers will not be too concerned. But if it starts to look like it may spike alarmingly above 5%, then officials may find themselves with little option but to slam on the monetary brakes, either by raising interest rates or imposing tough administrative credit controls – or both. If there is one thing that Chinese leaders fear more than slumping growth, it is inflation spiralling out of control. Everyone currently in power can recall only too clearly the role that runaway inflation played in fanning the protests that culminated in the Tiananmen crackdown of 1989.

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