NCPA - National Center for Policy Analysis

Inflation Rate in China Reaches Tipping Point

May 4, 2011

Despite efforts to rein it in, China's inflation rate has reached a point where it is sparking social unrest.  Chinese premier Wen Jiabao's recent comment that inflation is a tiger that "once set free is very difficult to put back in its cage" aptly characterizes the current inflation in his country.  The world's second-largest economy faces some fundamental choices if it is to restore stability, says John H. Makin, a resident scholar at the American Enterprise Institute.

In a new study, Makin makes these key points:

  • China is facing destabilizing inflation; capital has flowed into China must faster than it has flowed out, in part because Chinese residents are prohibited from investing abroad.
  • China's reported inflation rate on consumer goods rose to 5.4 percent in March, but its implied inflation rate is 8.4 percent -- a large discrepancy suggesting that China is underreporting its inflation rate.
  • Chinese authorities have taken some steps to lower inflation, but they may be delaying more drastic measures to avoid instability before the 2012 transfer of leadership.
  • China has the second-largest economy in the world -- accounting for one-third of global growth in 2010 -- so a Chinese hard landing would be very damaging to the global economy.

Source: John H. Makin, "Why China Overheats," American Enterprise Institute, May 2011.

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