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

Topics: Inflation, Monetary policy, Central bank Pages: 4 (1269 words) Published: April 3, 2013
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 factor and changes in the global economy are the main drivers of China’s inflation. Besides, to control such inflation Chinese government and financial authorities should take effective measures, including the strict financial policy, pricing control, and flexible exchange rate.

China’s inflation is caused by a number of factors such as excess liquidity, increasing food and housing price, and inflation expectation. However, monetary aspect is the main cause of inflation in China, reflected in two aspects. Firstly, too much cash in the economy may lead to excess liquidity, which means that the monetary aggregates’ increasing speed faster than the growth rate of GDP (Yang, 2010). In other words, excessive money supply creates the false scent of economic booming and results in overheated domestic investment growth. Consequently, demand dramatically increases and exceeds supply. When demand surcharges supply, the price of goods will rise. Huang, Wang and Hua (2010) indicate that CPI is expected to rise by 0.35% if liquidity increases by 1%, which is the most significant change in all relative factors such as food prices, assets prices, and so on. Moreover, excessive money supply causes monetary expansion with devaluate the value of...
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