China's inflation trends and economic impacts

¶ … 2014) about China's inflation rate notes that the official consumer price index in the People's Republic of China is 2%, which is below the official government target of 3.5%. Furthermore, this CPI is at its lowest level in 13 months. The article then discusses some of the causes of this inflation rate, and the implications that it has both for China and other stakeholder economies.

Falling producer prices are leading to the deceleration of the inflation rate in China, and this is generally viewed as being favorable by Chinese leaders. There has been a need in China to push ahead with economic reforms, but this pushed had been constrained by the risk of rapid growth. The country also experienced its largest trade deficit in two years, after exports dropped 18% and imports increased 10.1%. The article noted that some of the data is skewed -- in particular export data -- by the timing of the Lunar New Year, around which production in China generally halts. This would have the effect of skewing year-over-year monthly results when the Lunar New Year falls in a different month in 2014 compared with 2013, as was the case.

Discussion

Inflation in China was for a long time a significant macroeconomic issue. The country's economy was essentially built on exports of goods, which was facilitated by low costs, giving China a comparative advantage in manufacturing. While this was fuelled by both cheap labor and land, the cost of labor has been rising steadily, and this was leading to increases in the price of goods. Furthermore, China is dependent on foreign fuel sources, and that was also contributing to inflation. As a consequence, there has been significant concern that inflation in China would a) cause social disruptions and b) would put increased pressure on the yuan. A rising yuan would result in a reduction of the country's comparative advantage, ultimately leading to a decline in GDP growth. The prospect of a "hard landing" (Holland, 2014).

Analysts note, however, that China is now in trade deficit, a result of slowing exports and rising cost of imports, in particular energy and minerals. As a consequence, the decline in inflation is not necessary a good sign. While it might ease pressure on the yuan, the underlying data show an increase in Chinese debt. This could result, many analysts fear, in a period of deleveraging that contributes to lower production levels going forward, slowing the nation's growth. Thus, while in the past a decline in the country's inflation rate would likely have been viewed as positive, other changes in the macroeconomic environment of China have made it so that a decline in inflation to below target is something of a warning sign, that China is entering a period of deleveraging that could reduce its output. That, of course, would have knock-on effects around the world, with countries that have a high level of Chinese imports feeling the sting the most. GDPs around the world would suffer if China is forced into deleveraging by slowing domestic growth. A lack of inflation is something of a canary in the coal mine with respect to China's growth right now.