There’s no question that China will experience high inflation over the next few years says Andy Xie.
Due to lag effects of monetary policy and fiscal stimulus, the effects can’t be removed until a few years forward.
The only solution is to deal with upcoming inflation so that social strife is minimized:
China has entered an era of inflation. How high inflation averages over the next five years will be mostly determined by the rippling effects of monetary expansion in the past decade. It is too late to try to push inflation back. What is needed is action to safeguard stability during this inflation era.
The necessary policies for maintaining stability are (1) to increase interest rates to the expected average inflation rate over the next five years, (2) to increase allowances for the population on fixed payments (e.g., pensioners and students), (3) to accommodate market forces for wage increases, and (4) to decrease personal income tax rates to prevent rising tax burdens on inflation impact on nominal income.
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