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Inflation in China

By Matthew Yglesias on December 1, 2010 at 3:29 pm

"Inflation in China"

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Unlike the United States, China is not burdened by massive excess capacity and idling of usable resources. Also unlike the United States, China has a very real inflation issue to deal with:

Government ministries are pitching in. The banking regulator is trying to boost loans to agricultural projects. Representatives of the State Council, China’s cabinet, are traversing the nation on a food-price inspection tour, and the agriculture ministry is issuing optimistic updates on the planting of winter wheat.

“What the government has been trying to do so far is . . . control inflationary expectations through propaganda,” says Arthur Kroeber, managing director of Dragonomics, a Beijing research firm. China’s civil affairs ministry has ordered local governments to step up welfare payments to ensure the poor can afford food.

Beijing is handing out one-time subsidies of Rmb100 ($15) to more than 220,000 low-income workers. In Shaanxi province, the government has set aside Rmb60m to help university dining halls cover costs.

What’s both maddening and frustrating about this is that the simplest measure to curb China’s inflation is also the measure the US wants to see to help our shortfall in aggregate demand—let the currency float. A more valuable Chinese currency would increase real wages (and thus the affordability of basic commodities like food) without locking in inflationary expectations of nominal wage hikes. Meanwhile, it would assist in global rebalancing, boost demand for American-made products, and generally be in the interests of most Chinese people and most non-Chinese people. But China’s export lobby seems to have an iron grip on the government and the PRC is determined to try every possible anti-inflation measure except the best one available.

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