What Are Causes of Inflation in China and How to Cope with Inflation?

1277 Words Apr 11th, 2013 6 Pages
What are causes of inflation in China and how to cope with inflation?
In the past decades, China has experienced a rapid economic growth. However, Chinese people have been greatly affected by the inflation caused by such rapid economic development. Compared with other years in 2000s, the inflation rate in 2004, 2007, 2008 and 2010 were quite higher which more than 3 percent (Zhang, 2011). And in 2007 only, the Consumer Price Index (CPI) increased by nearly 5% from 2.2% to over 7% (Anderson, 2008). It seems to be clear that inflation rate has not been slowed down yet. Understanding causes of inflation as well as finding effective measures to fight against inflation are imperative for Chinese government. This essay argues that monetary
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Firstly, Chinese financial authorities should adopt the stricter fiscal policy. Since the main cause for Chinese inflation is excessive growth of monetary aggregates, the government should try to find ways to reduce the excessive amount of money in the economy. In order to recollect the extra money circulated in the domestic market effectively, Pettis (2008) suggests that PBOC must take some measures to tighten monetary aggregates, including raise the minimum reserve standard and interest rates of national commercial banks, sell central bank bills and the bounds of Ministry of Finance. For example, to diminish the inflationary pressure, both deposits and loans interest rate was raised by PBOC eight times during the period of 2007-2008 and the required reserve ratio was also raised 16 times over the same period (Yang, 2010).

However, depending on financial authorities only is insufficient. The management and supervision of prices of necessity goods (e.g. food) should be accompanied with the execution of the tighter fiscal policy. Although the prices of those products are not the main cause of Chinese inflation, they directly impact people’s daily life and are one of the most important components of CPI basket. For instance, the expense in food takes up about a third of Chinese people’s living expenditure (Anderson, 2008). Rangasamy and Swanepoel (2011) mention that food prices have occupied about one-third

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