How should a government combat runaway inflation? Most sensible economists would suggest a series of tightening monetary and fiscal policies to realign the aggregate supply demand picture. Well, China has raised interest rate four times this year, twice last month, to no avail. Prices, at both the producer and retail levels continue to bubble up, as do asset prices, such as the real estate and the equity market.
So we get this, from AP’s news desk:
China’s government has ordered some prices frozen and told officials to closely monitor others in its most drastic step yet to contain a surge in inflation.
The statement stressed the importance of maintaining “market stability” ahead of a key Communist Party meeting next month. It said controlling inflation would affect China’s development, reform and stability.
Beijing’s immediate worry is that rising consumer prices could spur public unrest. But longer term, economists say a sharp rise in the cost of wages, raw materials or energy could push up Chinese export prices, adding to inflation pressures in foreign markets or prompting buyers to switch to goods from less expensive countries
The price cap will last till year end. No word on just exactly what goods would be affected. AP’s call to the all powerful National Development and Reform Commission yielded no clearer answer.
Will the policy work? In the short term, Yes. But the band-aid solution only fixes the symptom and does nothing to address the fundamental issue fueling inflation today: excess liquidity driven by an export economy in over drive. Let’s hope for the sake of China’s economic well being and that of the global economy, Beijing has a second act after the price cap.
Jay Sheng is Shanghaiist’s Business Editor. Email tips, news and gossip about business in Shanghai and China to biz at shanghaiist.com.