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In May 2011, China’s inflation reached 5.5% mark; this is despite all the interventions and efforts by the government to control the rise in price of commodities. China’s National Bureau of statistics realized that the inflation was more than 5.3% in April, and this led to the announcement to increase the reserve requirement ratio by China’s Central Bank (Fewsmith 48).
The increase was effected from June 2011, with a deposit of 0.5% for all financial institutions. The inflation has had impacts on the economy of China thus affecting the lives of the Chinese people. This paper will discuss the effects and causes of inflation in China.
Effects of inflation in China
The effect of inflation is felt in various ways by the economy; first, the supply of fruits and food reduced. The supply is affected by the increase of prices of food in the global market, whereby, the Chinese government finds it difficult to satisfy the food demand of the increasing population of the Chinese population.
The increase in prices of food has caused a reduction in purchasing power of Chinese people, with this; life has become more difficult for Chinese people because they cannot do without the items (Klein and Shabbir, 102). The Chinese people are now struggling to live because the money they earn is no longer enough to satisfy their needs.
The prices of other products have also increased; therefore, the cheap products produced by the Chinese people to the world markets are no longer cheap because of the inflation. The costs of raw materials together with labor wage increases has led to an increase in the costs of production; it is because of the high cost of production that the price of finished goods have increased leading to a reduction in demand of goods from China. The sector that is most affected is that producing apparel, toys and furniture.
Causes of inflation in China
The inflation is caused by few key factors, and one of them is the strict control of currency by the Chinese government. The Chinese government argues that the strict control of currency will ensure that the country always has enough funds to pay for clearing its debts; however, this control has an indirect effect on the country’s economy.
The strict control makes the importation of food as well as energy resources to be more expensive (Fewsmith 63). When the energy resources are expensive they increase the cost of production because it is one of the factors of production; this, in turn, increases the price of finished products.
The increase in price of Chinese goods in the international market has reduced the demand for the goods, which leads to a reduction in the exports.
The reduction in exports coupled with the Chinese growing population then continues to increase for consumer goods in China and because the goods made locally are expensive for the Chinese population to afford the imports becomes more (Klein and Shabbir, 99). The country contributes to increased inflation by consuming more imports than before thus increasing need to use more of its foreign exchange reserves.
The Chinese growth in population has suffered a lot because of the increase in food prices in the world market; the increase has caused an increase in food price in China as well, with the increase going as far as 50%.
This means that the little money earned by the Chinese citizen, most of it is spent on food and other products and services whose prices has increased, and as a result, the minimum wages have increased. The increased level of spending on food and other expensive products leave citizens with any fund to save or invest; also, they fear spending all of what they have for fear of the future.
The global market has also increased prices for raw materials, which take the biggest portion of cost of production; this has led to the increase of price of finished products and in turn reduced the demand for Chinese products (Fewsmith 56).
Another issue of Chinese inflation is that China exports more than it imports; this creates current surplus. The government is then is forced to print money for sale so that foreigners can have currency to buy their products, and when all these money is supplied in the Chinese economy, it increases the inflation further (Academy of Political Science (U.S.) 77). This trend will continue as long as China continues to export more and more, unless solution is sought to help China to deal with its exports without having to print currency.
The Chinese government is trying hard to reduce the inflation and considering the causes. It is evident that money circulation is the biggest problem and China being a country that is so active in business activities, money circulation should be under control. To control the circulation of money, both local and foreign currency, the Chinese Central bank has increased lending rate to commercial banks; this will help to strengthen the weakening Chinese currency.
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Academy of Political Science (U.S.). China’s Developmental Experience. New York: Academy of Political Science, 2009. Print.
Fewsmith, Joseph. China Today, China Tomorrow: Domestic Politics, Economy, and Society. Lanham: Rowman & Littlefield, 2010. Print.
Klein, Robert & Shabbir, Tayyeb. Recent Financial Crises: Analysis, Challenges and Implications. Cheltenham: Edward Elgar Publishing, 2009. Print.