It is no doubt that China has conquered the market in the recent decade. However, it seems like their economy is overheating. This means that the economy’s inbuilt stabilizers such as higher taxing, and unemployment falling are not sustainable. Every country should have have an inflation percentage of 1 -3% to indicate economic growth however, China’s inflation has picked up rapidly since March and April. This is not unexpected as inflation is a given with the rate at which they are expanding. So should China turn to monetary policies which will increase interest rates to fight inflation or should they use fiscal policy to increase tax rates which will decrease consumer’s disposable income and therefore decrease aggregate demand? Currently the Chinese government is waiting to see how the crisis in Europe will play out before they make their decision.
However, they are considering monetary policy. The People’s Bank of China has already taken a number of steps to curb growth, including raising reserves that banks are required to hold. Next could be raising interest rates, which have remained unchanged since late 2008, and even letting its currency, the yuan, rise in value.
THE RISE IN PRICES OF PRODUCTS
A reason why China’s economy is experiencing inflation is the high cost of productions. The high costs of productions push the SRAS (Short run aggregate supply) inwards, meaning less output and higher prices. The high cost of productions also include wages. Though foreign companies invest in China’s market because labor is cheaper, the value of Yuan has been rising lately which may mean more payment to workers.
The figure above considers the change interest rates, production and labor, and Consumer Prices Index % (CPI) over the last 11 years. A steady trend is set of the inflation rate moving upwards. By 2008 the inflation rate is approximately 8.5% and still rising today. The healthy 1-3% of inflation is far past. Though the high inflation means immense economic growth, the citizens of China will be faced with high prices for essential needs. Furthermore, poverty prevails consistently in the rural areas of China and increasing taxes will only cause stagnant demand and a further crisis.
What do you think the Chinese government should do? Should they use Fiscal or Monetary policy?
Comment below :).
For more information visit: