Chinese Whispers as Strategic Tools

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China’s record on keeping its inflation under control has been quite remarkable of late. What could possibly explain this?

As the rest of the world worries about economic  expansion, China has lowered its GDP growth target for 2012 to 7.5 per cent. It has done this a few times in the past too. What is more interesting, given its lack of democracy, is Beijing’s attitude to inflation. The Tiananmen rebellion of 1989 had its genesis partly in runaway prices (inflation of above 20 per cent), and so the regime has feared it ever since. Nowadays, however, it views inflation control as good economics. ‘There is concern as to whether China can rein in inflation and sustain its rapid development. My answer is emphatic: yes,’ wrote Chinese Premier Wen Jiabao in Financial Times in mid-2011. This was around the time China’s general inflation had risen to 6.5 per cent (with food inflation at 15 per cent). “The Chinese government did not allow inflation to go through the roof,” says Syetarn Hansakul, an expert at Deutsche Bank. In fact, by early 2012, it had fallen to 3.9 per cent (with food inflation at 8.3 per cent), going by its statistics for January and February.

How does China manage this? One answer is that it operates purely with its own conditions in mind; after the Great Recession, some say, Beijing repackaged many of its old spending plans as a government ‘stimulus’, without letting too much excess money flow into its economy. Another answer is that a State-led growth model helps it control prices directly. Not just by setting prices, but investing. As Hansakul explains, the model has resulted in so much overcapacity that production can be upped easily at the stroke of a central command.

In last year’s case, China made many timely moves as well: the release of foodgrain reserves, import of commodities and incentivisation of suppliers. In tandem, it used indirect price controls. Subtle signals were conveyed to wholesalers and retailers to keep people’s daily necessities within affordable limits. In China’s authoritarian setting, these worked as warnings for hoarders/speculators: since the State was willing to crack down on prices, they figured they had better offload stocks before their bets on higher future prices turned into money losers. That is how speculative impulses were held in check: through clever psychological tools.

Credit was also tightened in an effort to stabilise inflationary expectations. Since October 2010, the People’s Bank of China has raised its policy rate from 5.3 to 6.5 per cent. But China is not a market economy, so it is the other efforts that were perhaps more effective.