Low inflation stimulates stable economy

Updated: 2012-10-16 17:38

By Tom McGregor (China Daily)

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China continues to enjoy remarkable growth, despite a slow recovery in the US and sovereign debt crisis in Europe. The International Monetary Fund forecasts the nation to hit GDP growth of 7.7 percent this year. The job market remains strong and inflation levels are dropping, which means a better quality of life for Chinese consumers overall.

On Monday, Beijing announced that, "the September Consumer Price Index increased 1.9 percent year-on-year. The CPI, a key inflation gauge, grew 2 percent in August and hit a two-year low of 1.8 percent in July," as disclosed by Chinese media reports.

China's central bank seems to be taking measures to fend off inflationary risks as its primary focus and these efforts deserve to be applauded.

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As reported by Emerging Markets news Website, Yi Gang, deputy governor of the People's Bank of China, "delivering a speech on behalf of PBOC's governor … expressed confidence that inflation would be 'fine' this year in China, forecasting it at around 2.7 for the year. But during the 30-minute address he reiterated six times that the PBOC's main priority was combating inflation."

He explained the central bank's strategy is "looking at inflation and afterwards at growth, unemployment and the balance of payments, in that order, when deciding on monetary policy".

He calls for Beijing to push ahead only on small-scale stimulus measures to avoid creating a financial bubble.

"The stimulus package, I think, this time will be appropriate in terms of size," Yi told Emerging Markets. "When I say appropriate in terms of size, that is large enough to stabilize growth, but not too large to cause some further negative impact, or negative problems in the future."

Yi hopes that China could avoid the trap of taking on excessive government spending projects that could lead to large, out-of-control deficits, which had occurred with some EU member countries, including Greece and Ireland, in which these governments needed bailouts to avoid default on its debt payments.

Surging deficit spending may spark some growth for the domestic economy in the short term, but could slow down structural growth rates in the long term. Stimulus measures can be effective during moments of financial crises. However, China appears headed towards an annual growth rate of nearly 8 percent this year.

So, no need to panic and the PBOC has made the correct decision to restrain inflation.

Consumers benefit the most from lower inflation, especially those with low incomes when purchasing daily necessities. Fortunately, food inflation is slowing too in the country.

The National Bureau of Statistics disclosed that, "prices for pork and fresh vegetables fell markedly when supply expanded," in September. Additionally, "food prices increased 2.5 percent year-on-year in September, 0.9 percent of a percentage point lower than the August rate."

The report was publicly released a few days before "World Food Day", which is celebrated by NGOs from all over the world to raise awareness on global hunger.

Although the PBOC is keeping inflation under control, US Federal Reserve Chairman Ben Bernanke has moved forward on quantitative easing that could lead to higher inflation worldwide in the months ahead.

Related reading: Central bank governor stresses inflation control

PBOC's Yi Gang warned, "if you have quantitative easing and that influences commodities, especially energy and food, it would influence inflation through imports."

He said to Emerging Markets, "the main inflation threat is agriculture and the second thing is the imported energy threat through commodities, raw materials and energy imports."

The PBOC suggested it would continue to fight the negative impact of global inflation by continuing on with monetary measures such as "raising the reserve requirement ratio, or RRR, which is the proportion of deposits that commercial banks must keep in reserve with the central bank," according to Emerging Markets.

Fending off inflationary risks is vital for a sustainable economy in the nation. Meanwhile, the US and EU appear rebounding toward a stronger economic recovery, and perhaps China's economy could rise higher-than-expected with stronger export demand, while enjoying a lower inflationary period as well. That's a two-for-one special for China.

The views do not necessarily reflect those of China Daily.