China's expansionary monetary policy has been the primary cause behind recent price hikes. Food prices in particular have been a main contributor to the nation's high inflation.
In March, China's annual inflation rate was at a three-year high of 5.4%. Last month's inflation rate dropped slightly, clocking in at 5.3%. The National Bureau of Statistics has stated that factory output has fallen more than 1% below the March figure and is significantly lower than economists' calculations. In April, anger over rising fuel prices led to three days of protests in Shanghai.
The Chinese government began introducing measures in October 2010 to target the increased costs of food, shelter and petrol. Now that Beijing is tightening its monetary belt, Andrew Batson at Dragonomics believes inflation will fall over the course of the year. Economist Brian Jackson from the Royal Bank of Canada predicts the strengthening of the Yuan against the dollar.
Appreciation of the Yuan could lower the cost of imported goods, alleviating inflationary pressure. Jackson also believes that the Chinese central bank will further increase borrowing costs. The central bank has already done so four times since last October and has boosted bank reserves seven times.
Possible Pause for Interest Rates
However, despite these policy changes, reports indicate that China is carefully considering stopping interest rate raises and even cutting them in the last two quarters of the year. According to Wang Jian from the National Development and Reform Commission, the calming of China's monetary policy will be most noticeable in the final quarter.
Wang told Reuters that investment in new projects has declined; however, investment in infrastructure experienced growth of over 25% in the first quarter of this year. Wang questions whether it would be wise to continue anti-inflation measures when China's growth has decelerated.
Food prices continue to increase at an annual rate of over 11%, but Wang believes that high labor costs are the real cause for inflation. If this is true, China's change in monetary policy will have little impact on inflation.
Key Statistics – China's Economy (source: the CIA World Factbook)
- GDP: Real GDP indicates that China has grown over a percentage from 9% in 2009 to 10% in 2010. China currently has the 7th highest growth rate in the world.
- Public Debt: When compared to other nations, China's public debt is ranked 113th in the world, right between Hong Kong and Saudi Arabia. Its public debt is currently at 17.5%, up from nearly 17% the previous year.
- Commercial Bank Prime Lending Rate: Ranked at 142 in the world, China's commercial bank prime lending rate has remained at 5.3%.
- Inflation Rate: Inflation has dramatically risen from -0.7% in 2009 to 5% in 2010. China's inflation ranks 140th in the world. An article from the British Broadcasting Company predicts that China's inflation will begin to decline in 2011.