The One Phrase That Doesn't Appear In China's Latest Scheme To Fight Inflation

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A couple weeks ago, China began a new “tightening” regime, in an attempt to curb runaway price inflation, which has had the effect of significantly weakening regional equity markets, and the markets that depend on China.

Economist Yiping Yuang, Professor of Economics at the China centre for Economic Research, Peking University, has an interesting post at VoxEU pointing out the one phrase that doesn’t appear anywhere in the national anti-inflation directive: “monetary policy.”

Instead it’s pure, old-fashioned central planning of the economy.

One possible reason is because some prominent Chinese economists argued that current high CPI reflects structural adjustment of prices, not inflation. If that’s the case, then we don’t need monetary policy tools. But if general prices are rising at faster paces, then it is hard to argue that it is not inflation. Inflation is a monetary phenomenon. In 1988, 1994, and 2007, there were always economists arguing that high CPI was the result of structural price adjustment. Without seriously tightening monetary policy, inflation ballooned out of control in all those years.

Indeed, the policy measures suggested by the “Sixteen Articles” were not only micro in nature, but also central planning in style. For instance, they called for better management of farms for winter grains and oils. They required the railway department to properly arrange cotton transportation in Xinjiang. It ordered the state power grid not to cut off power supply to fertiliser factories and to close down some illegally built corn processing factories. I really lost the sense of time. Are we really entering the second decade of the 21st century after 30 years’ market-oriented reform?

The authorities in Beijing get high praise for their management of the economy, especially from Western business leaders. But things like this — price controls with one hand, and easy money from the other — should call all that into question.

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