With somewhat slower economic growth and an increasingly clouded outlook in the global economy, I have been wondering what Chinese policy makers would really like to do amid stubbornly high inflation. Yesterday, we had Brazil cutting rates, which baffled some analysts, but tells you that some emerging economies are worried about growth.
If anyone has been hoping that the Chinese policy makers would start easing, as I have repeatedly pointed out, there is no reason on the inflation front why they should do so. Still, as Victor Shih and Carl Walter pointed out recently, China may prefer inflating the problems away, and credit crunch is more of a concern for the “ruling class” (if you like) than is inflation.
And we must keep up appearances so yesterday Wen Jiabao came out and said that inflation-fighting remains a top priority, and that the government will continue to curb property prices. AFP quotes Wen Jiabao saying that:
Currently our country’s economic development is still facing a very complicated domestic and external environment that is unstable and fraught with many uncertain elements, [but] stabilising overall price levels remains the priority task of our macroeconomic controls (and) will not change.
I welcome this if he is going to do what he says. Although that would put the economy at risk of hard-landing/recession (whatever you would like to call it), it is unavoidable if China is serious about curbing inflation.
If he really means what the government and central bank will do, I think it would be fair to expect more monetary tightening from the People’s Bank of China down the road. I do not expect aggressive action, however, as the global macroeconomic slowdown will inevitably hurt the Chinese economy as external demand contracts, and that is already happening, as we have just seen it in the latest PMI figure. One or two rate hikes and/or reserve requirement increase by the end of this year would be the most probable outcome, unless we see a more rapid deterioration in the global macro picture.