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It is true that China is now under pressure of inflation. The real estate and capital markets are overheated; the prices of food and resources have risen. Investments in property development were up by 27 percent in the first quarter of this year, compared to the same period last year. The Shanghai Composite Index rose by 19 percent and the Shenzhen Index rose by 28 percent. Food prices, electricity consumption, and added value of the six largest energy-consuming sectors went up by 6 percent, 16 percent and 20 percent respectively.
There is excessive growth in loans, investments in fixed assets, the inflow of foreign capital, property prices, surplus production capacity, the prices of steel, iron ore, copper, aluminum and fuel oil. In the first quarter, 12 provincial electricity networks experienced shortages or imposed restrictions on electricity use. Environmental pressure and the cost of environmental protection have both increased. All these factors indicate increasing inflationary pressure.
However, in my opinion, as long as appropriate regulations and controls are in place, currently China will not face a seriously overheated economy. There may be slight inflation, but the overall economic situation is basically still healthy.
To judge whether the economy is overheated, we need to first look at whether the profit of enterprises has increased and whether there is a shortage in the supply of resources.
In the first quarter of this year, 12 major industrial sectors increased their profits by over 20 percent. The only exception to this trend was the electric sector, which had a lower profit than this time last year. Some sectors had profit increases of up to 40 percent. Wages rose by 14 percent.
The output of raw coal increased by nearly 15 percent compared to the same period last year. Market supplies are relatively plenty: electricity supply grew by 15 percent, which was 4 percent faster than the same period last year.
At the same time, some positive signs have appeared in the national economy. The rate of increase of the money supply dropped by 1.5 percent; the growth of fixed assets receded by 4 percentage points; the price of cultural and entertainment products declined. Investment growth in western China was faster than in eastern China; the growth rate of the total volume of retail sales sped up; and price-driven inflation is giving way to demand-driven inflation.
Such slight inflation is not a bad thing. On the contrary, it is helpful for generating capital, profit increases and government income growth. It can also facilitate production, increase employment, and improve people's incomes. Therefore, regulation and control measures must be moderate. The main approach should be to use market methods for micro adjustment and restructuring; the loan policy should not be too strict; more national debt should be invested into profitable areas. The government should adjust the deposit reserve rate, the interest rate and the open market business. Furthermore, it should especially develop the marketization of the increase rate to guard against real estate and financial risks.
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(Hu Xingdou is professor of economics and China issues at the Beijing Institute of Technology and an expert on social problems. This article is translated and edited from the Chinese. ©Copyright Hu Xingdou.)
