High inflation era has ended
Inflation, which may shadow China's economy in coming years, will be much less dramatic than in the past.
On January 20, Li Deshui, director of the National Bureau of Statistics, announced that China achieved 9.1 per cent growth in gross domestic product (GDP) in 2003, the highest since 1996. The price index also increased by 1.2 per cent, he said.
The announcement triggered discussion among economists, some of whom worry that the Chinese economy may be over-heated and a new round of inflation is at hand.
In the early 1990s, broad money or M2, an economic index indicating money supply, grew by 20 to 30 per cent annually and brought about a soaring consumer price index in 1995 and 1996. The inflation rate in 1995 was as high as 21.7 per cent.
Since the consumer price index did not grow after 1997, the central bank resorted to expansionary monetary policy to stimulate domestic demand.
The broad money supply has increased by 16.5 per cent on average since the year 2000, which is twice the GDP growth rate plus that of inflation.
According to traditional economic theories, prices should be growing significantly given such a rise in money supply.
But the inflation growth rate remained at less than 1 per cent over the same period. That is why many economists regard China as in a state of low inflation or even deflation.
To sum up, price indices have not changed much and the inflation rate is low despite the steep rise in money supply.
The reason behind the phenomenon is that the statistics collected to calculate price indices do not reflect actual inflation in China.
The money that has come into circulation has flowed into fields that are not taken into account in traditional statistical methods.
The real inflation rate in China could have surpassed 4 per cent in recent years if all factors had been included.
Many fields attracted huge sums of capital but were excluded in the calculation of the consumer price index.
The first of such money pools is the capital market. Coming into being in the 1990s, the capital market, where stocks and bonds are traded, drew in 1 trillion yuan (US$120.5 billion) of money every year. Stocks and bonds accounted for 15 per cent of the belongings of an average Chinese family.
The existence of such a market eases the inflation pressure of consumer goods.
The second pool of money is art collections. Works of art have seen rocketing prices in recent years and attracted at least 500 to 600 billion yuan (US$60.2 to 72.3 billion).
The third money hot spot is assets which were not traded or measured in monetary terms before.
For example, a government building did not have a price tag under the planned economy. But when it becomes a commodity in an auction now, it is a tangible asset which has an exact price.
Changes of such kind have to be backed with currency.
The market for human resources is the fourth field that needs currency. The market for professional managers and senior staff will be established soon after the modern system of ownership takes shape in enterprises. Human resources, which used to be low priced, will then have a relatively high market price.
The fifth field that has attracted major injections of money is foreign direct investment. The inflow of foreign investment has to be converted into renminbi and has accounted for US$50 billion annually in recent years.
Besides the fields listed above, there are many other fields drawing huge sums of money.
China is undergoing an unprecedented monetization of assets, which means the assets, tangible or intangible, are being converted into money. The assets placed on the market for the first time are showing their value by attracting large amounts of capital.
These fields are quietly "devouring" capital, balancing the seemingly excessive money supply in circulation. But they are not counted when the authorities estimate the consumer price index.
This is why the official inflation rates of recent years are close to zero, or even indicate deflation.
The real inflation figure is much higher than the official estimate if people's experiences in everyday life are a guide. The costs of education, energy, communication and transportation have all risen considerably, though many academics and officials claim people are living in deflation.
It is highly probable that China will experience inflation in the near future because the central bank is unlikely to tighten money supply under current conditions.
But the inflation will be much milder than the rates recorded in China in the 1980s and 1990s.
As there are many pools of excessive capital, money will be channelled into real estate, securities, art collections and similar markets. It will not cause much upward pressure on the price of consumer commodities.
The dramatically high inflation rates of the past are unlikely to recur.
This will be the scenario in 2004 and for several years to come. Inflation will probably be recorded in capital markets or real estate. But only after these markets witness high inflation, indicating the capital pools are relatively full, will other commodities rise in price.
Inflation is inevitable because Chinese prices are closer to world prices as a result of economic globalization. And that should be the basis for drafting monetary policy.
The author is the director of Dajun Centre for Economic Watch and Studies based in Beijing.