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Stability-Based Aggregate Policy: Efforts for Advancing Structural Readjustment

Dec 06,2011

——An analysis of economic situation in the first half of 2011 and prospects for the whole year

DRC Task Force on Analysis of Economic Performance

Since 2011, the world economy has assumed a "double-track growth" in both developed economies and emerging economies which are sharply diversified over their macroeconomic policies. The continuously easy policies of the developed countries have intensified the pressure of inflation on developing countries. The CPC Central Committee and the State Council have persevered in putting the objective of price control in the first place in macro-control policy and have adopted a series of policies and measures. As a result, the drastic price rise has been alleviated, CPI peak value is drawing near and the pressure of inflation is diminishing within the year. At the same time, the economic growth has seen some downturn yet remains normal on the whole. The short-term macroeconomic policies should be based on stability instead of being made easy, with prudent observations on economic performance. While cementing the effects of the price control, we should expedite the structural readjustment and dispel underlying risks and, meanwhile, we should make the best use of the circumstances and put forth effort to plan and advance the reform of related key sectors to create favorable conditions for a longer, sound and rapid economic development in China.

I. Pressure of Price Rise Diminishes and the Economic Growth Shows a Normal Short-term Readjustment

1. CPI peak value draws near with a limited downturn in the latter half of the year

Since the fourth quarter of last year, the pressure of price rise has strengthened dramatically, driving up CPI constantly. CPI had risen by an average of 5.2% in the first five months of 2011 to 5.5% in May and would hit a record high in June. This round of price rise and the time of duration have gone beyond expectations and have presented following new characteristics:

First, the time-lag relationship between the money supply and the price rise has improved evidently. In terms of historical experience, M1 growth has a relatively stable relationship with CPI, namely, M1 is ahead of CPI by an average of about 8 to 10 months. In this round of price rise, M1 peak value appeared in January 2010 and has now dropped to a lower level of 12.7%. The CPI peak value is not yet fixed and the time-lag relationship between the two has improved evidently. Due to the handsome amount of accumulative money supply in previous years and the sizable liquidity on the market, structural change has taken place in money flows. Therefore, the retrenchment on the same level plays a diminishing role in containing the price rise.

Second, food and non-food prices have gone up synchronously. The price rise that occurred in 2004 and 2008 was mainly characterized by the drastic rise of food prices, while non-food prices remained relatively stable, with the price gap between the two widening notably. Things are different with this round of price rise. Although the price rise is still the main driving force behind the rise of commodity prices, the non-food prices have gone up by a wide margin, with the degree of relative price change between the two being smaller than previous two times. In recent years, the wage growth in the manufacturing industry has been gradually transmitted to the service sector and the labor cost has gone up at large, which has been reflected by various industries through price readjustment.

Third, prices of upstream products have been transmitted to midstream and downstream industries more drastically. Since August 2010, the rise in prices of staple commodities has slightly driven up the purchase prices of raw material, fuel and motive power for industrial enterprises, leading to a sharp rise in consumer prices of raw material industry, the processing industry, means of subsistence and non-food products. Owing to the acceleration of the adjustment of raw material inventories by enterprises and the rise in prices of such production factors as labor force, the ability of midstream and downstream industries and that of intermediate links to digest and absorb the prices of upstream products has degraded dramatically.

The CPC Central Committee and the State Council, being aware of this round of price rise beforehand, have promptly adopted a series of macro-control measures since the fourth quarter of 2010. Thus, positive results have been achieved. The CPI peak value will hopefully show up in coming two months and the pressure of price rise will bate gradually in the latter half of the year. First, through continuous increase of the deposit reserve ratio and the interest rates and the optimization of the credit structure, in terms of the current money credit, exchange rate and fund demand and supply, monetary conditions have been turned from "easy conditions" to "adaptable conditions" and the monetary conditions for controlling the price rise have improved evidently. Second, the base effect has gradually weakened. Of the CPI rise in the first 5 months, the carryover effect contributed 3.05 percentage points, with the contribution rate reaching 58.7%, and then the percentage points registered at 3.5 and 3.2 respectively in June and July and will go down dramatically after August. Third, with the seasonal downfall of the vegetable and fruit prices and the comprehensive governance of the intermediate links, the month-on-month food prices have gone down continuously since March, with the ratio being controlled at 11% or so in most months from a year ago. The excessively fast rise of food prices has been brought under control. This year, the summer grain crops have seen another bumper harvest and the influence of special disasters and extreme weather over food prices is controllable on the whole. Fourth, affected by such factors as the slowdown of the world economic growth and the short-term rebound of US dollar, prices of staple commodities have reduced, PPI for Chinese industrial producers and the price index for imported goods have declined and the role played by imported factors in driving up prices has deteriorated.

Despite the above-mentioned favorable factors, some factors for the continuous price rise still exist. The CPI will decline by a limited margin in the latter half of the year. At present, prices of most Chinese agricultural products are lower than those in the international market. With the constant growth of the production cost, the mild rise in prices of agricultural products will become regular. The pork price surged by 40.4% in May from a year earlier and the prices of poultry meat and relevant products went up by 24.3%. Recently, prices of pigs and meat have surpassed the highest in 2008. The ratio between the pig purchase prices and the grain purchase prices reached 8.16:1 in the fourth week of June. In view of the base effect, the pork price may go down slightly in the latter half of the year, butt will remain an upward trend for the whole year. The pork price alone will drive up the yearly CPI by more than 1 percentage point. Internationally, although the United States has not put out the third round of quantitative easy monetary policy (QE3) as its economic growth is lower than expected, its unemployment rate remains high, and the Federal Reserve continues to maintain a low interest rate. Despite the retreat of the QE2, large amounts of due funds will still be used to purchase bonds, bringing about a continuous liquidity to the market. Therefore, the dollar index is not motivated for a continuous rebound in a short period of time, and the prices of staple commodities will remain high.

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