China has grown from a third world country to become the world’s second largest economy after the United States. This ranking is based on nominal gross domestic products and purchasing power parity (Chow 3). On the road to becoming the second largest economy, China has experienced growth rates of about 10% in the last 30 years making it to top the list of the fastest growing economies.
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In addition, to the above achievements, China also prides itself at being the largest exporter and second largest importer of commodities in the world (Chow 12). According to a report by the International Monetary Fund in 2011 on countries’ per capita income, China attained position 90 by nominal Gross Domestic Product and 91 by Purchasing Power Parity (Inch 116).
On the road to achieve the above, China has gone through numerous challenges both monetary and non-monetary. Among the biggest challenges it has faced is inflation. This has been an issue from the 1980s to the present. By gathering information from books, online articles from magazines, journals, and scholarly articles, this paper will examine China’s rapid growth and the resulting inflation. It will also highlight the effects of the inflation on the people of China.
This study is important because most people tend to highlight only the brighter side of China’s rapid growth. The negative effects of the growth are ignored and yet they are just as significant as the positives. By conducting this study, most of the effects created by the growth such as inflation and its effect on the people will be highlighted. Inflation has adverse effects on the people. It is a dangerous and fatal disease which if it is not controlled early enough, it can destroy the society.
It is vital to note that China is ranked as one of the most industrialized countries. However, what is never revealed is that most industries are located in the coastal regions leaving most of the hinterland being less developed. China has experienced rise in inflation due to factors such as increase in fuel prices and other commodities prices notably pork. It once attained an all time high of 7.1% in 2008 prompting the state to take rapid action to reduce it (Inch 214).
Review of Literature
Causes and Effects of Inflation in China
Many governments through their respective central banks always try to put in place measure to control the inflation rates. This is due to the adverse effect of inflation on household expenditure and macroeconomic policies. In China, there have been periods of deflation and inflation even though inflation has been prevailing throughout.
For instance, inflation was observed in the following periods; 1984-1984, 1988-1989, 1993-1994 and 2007-2008 (Inch 217). On the other hand, deflation was only experienced in the period 1998-2002 only. The inflation experienced can be attributed to expansionary monetary policies and rising wages i.e. China was experiencing cost-push and wage inflation. High prices of commodities such as crude oil and pork have also contributed to China’s inflationary woes.
The period between 2007 and 2009 was characterized by increases and decreases in commodity prices. Monetary policies were tightened and loosened resulting to escalating prices. By March 2013, consumer prices had risen by 3.2% from last year. Food prices had also risen by 6%; the situation was worsened by Lunar New Year Festivities in February.
For instance, pork prices have risen so rapidly to the extent the government has been forced to be involved. There are concerns that if the prices will continue to rise up, China will have to find means to tighten their monetary policies since a social unrest is inevitable. Tightening monetary policies may also hurt the rapid growth being experienced. Moreover, this would also worsen the situation since China has been a victim of other countries monetary policies (Inch 220).
In the year 2010, China had issues with the US Monetary policies. According to various sources in China, the country was suffering from imported inflation. This was attributed to the “out of control” dollar issuance by the United States (Dryslade 47).
China’s cost-push inflation was fuelled by increasing cost of firms that subsequently led to rise in wages (Chow 26). The firms are then compelled to increase the price of commodities to cover for the costs incurred due to the wages. The high wages means that people will consume more stretching the aggregate demand to a higher level.
The increase in wages only applies to the employed. This therefore means that the unemployed face hard times in view of the high prices. The subsequent result is that inflation has led to poor quality of life in most people especially those who are inland; far from the industrialized coastal towns (Gao and Zhu 47).
Rising commodity and housing prices are the burdens the people have to bear due to inflation. Furthermore, the causes have not yet been dealt with completely such as the wage and cost-push inflation. The government has been in the forefront trying to put in place measures that will bring the rate down while at the same time maintaining the growth rate. Individual steps are also being taken to curb the effects of inflation.
The first step to curb the cost-push inflation is for the government to provide subsidies to businesses. This will reduce the burden of costs of production that are subsequently passed to the consumer. A reduction in production cost will be passed to the consumer in form of low prices. The only challenge will be that the plan may overstretch government resources especially if there are many businesses to be rescued (Huang 59).
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Another move by the government would be to appreciate the value of the Yuan. This monetary policy can be applied by reducing the amount of currency in circulation thereby increasing demand i.e. use foreign currency reserves to buy local currency from the market. This will help production companies and other businesses to get raw materials from other countries cheaply; which will subsequently lower commodity prices due to reduced cost of production. Even though this method may work, it has adverse effects on growth.
It is vital to note that China has risen fast to become what it is today even though it faces a lot of challenges including the inflation. Inflation as observed decreases the quality of life of the people due to the rise in commodity prices. The people who live in the inlands are more disadvantaged since most of the well paying jobs are based at the coastal.
However, some of the causes are internal and therefore, being a strong economy, the causes could be rectified easily using appropriate monetary policies such as the appreciation the currency. Regardless of the challenges, China is still the economy to beat.
Chow, Gregory. Interpreting China’s Economy. London: World Scientific Publishing Co. Ltd, 2010. Print.
Dryslade, Peter. “China’s inflation problem.” East Asia Forum Magazine. 28 March 2011. Print.
Gao, Shangquan and Zhu, Huayou. Rapid Development in China and controlling inflation. Beijing : Foreign Languages Press, 2007. Print.
Huang, Yasheng. Inflation and Investment Controls in China : The Political Economy of Central- Local relations During the Reform Era. New York: Cambridge University Press, 1996. Print.
Inch, Jason. China’s Economic Supertrends. Beijing: InChina Publishing, 2012. Print.