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UPDATED: September 14, 2007 NO.38 SEP.20, 2007
Is Inflation China's Latest Export?
It is useless to worry too much about inflation. Moderate inflation is inevitable during any sustained growth period. Its damage on the economy is very limited if it is kept under control
 
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Recent food and energy price hikes in China won't deal a heavy blow to the world economy. Chen Zhiwu, professor of finance at the Yale University School of Management, tells Xinhua News Agency why.

Xinhua: Recently, prices of some consumer commodities have been surging in China and other countries. This has triggered fears about a looming "global inflation era." Some people believe China is to blame for this. What is your opinion?

Chen Zhiwu: I think such fears are exaggerated. It is also groundless to say that China is now exporting inflation to the rest of the world. In fact, the global market has not seen an overall uptrend in the price of manufactured goods. This is because the world is still challenged by overcapacity. There is also a labor surplus in emerging markets. All these factors will curb the rise in prices of manufactured goods. In this sense, China will continue to play a positive role in stabilizing consumer prices and holding down global inflation.

Prices of agricultural products and other commodities, metals and energy in particular, are going up even more sharply compared to manufactured goods. What has prompted this price jump?

Mainly it resulted from growing demands and tight supplies. The recent fever over bio-fuels has driven up agricultural product prices. With skyrocketing oil prices, some countries began to adopt alternative energy strategies. Corn, a key raw material for bio-fuels, suddenly became extremely precious and stimulated the price surge of all agricultural products. But output of products such as corn can be very easily multiplied. A persistent price hike is highly unlikely.

Compared with agricultural products, iron ore, nonferrous metals and oil are non-renewable resources with limited reserves and supplies. Price hike pressures on these commodities have been around for years and will remain in the foreseeable future. On the demand front, the insatiable appetites of China, India and other emerging economies have been pushing up crude oil prices globally.

However, I do not think we need to be over-concerned about the future. History tells us that capital and human resources will pour into the development of alternative solutions when a commodity's price has risen to a certain level. As a result, cheaper and better alternative products or technologies will emerge.

What should the government do in the face of record-high consumer prices?

The market economy has scaled considerable heights in today's China. This has weakened the government's grip on the market. If the government goes against market rules and tries to stabilize prices through administrative measures, even more problems will surface.

In fact, it is useless to worry too much about inflation. Moderate inflation is inevitable during any sustained growth period. Its damage on the economy is very limited if it is kept under control.

What else can the government do aside from reducing intervention?

Market mechanisms could play a bigger role in agriculture. The government has introduced futures trades for some agricultural products and I think there should be more. China could have pork futures, for example. Future contracts could be used to secure farmers' profits. They also reduce market risks, guarantee supply and stabilize prices. Many developed countries use them.

In terms of energy, the government should work harder to cut down energy consumption and look for alternative sources such as solar, wind and atomic power.

What lessons can China draw from the recent U.S. subprime crisis?

We can learn a lot from this credit crisis. The most important lesson is that every country is heavily influenced by what is happening overseas. With increasing integration of the world's economies, it is impossible to remain a bystander.

It was not the U.S. Federal Reserve, but the European Central Bank and the Japanese Central Bank that first took countermeasures right after the crisis broke out. The European Central Bank alone has injected 94.8 billion euros into the euro-zone banking market. One country's economic turmoil could translate into a global one. That is why it would be a lot easier if different nations join hands and tackle problems together.



 
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