Many economies in the world, including the United State, are working on stimulating their struggling economies. China, on the other hand, is working on the opposite. The rampant economic growth in China raises concerns that inflation will get out of control.
China recently ordered banks to set aside more cash reserves. This in turn will reduce money available for loans, a strategy used to slow the market. The decision on Sunday to raise the capital reserve ratio for banks, to 20.5 percent of their cash, was the fourth such increase this year. This decision follows the government announcement on Friday that China’s economy was growing at an annual rate of 9.7 percent, by far the strongest performance by any of the world’s biggest economies.
Because China is now the world’s second largest economy, after the United States, and because the country has been a leading source of global growth during the last two years, money problems here can reverberate across the globe.
High inflation endangers China’s status as the low-cost workshop for the world. And if the government’s efforts to fight inflation cause the economy to stumble, that will cloud the outlook for international businesses.
Beijing is currently engaged in an economic tug of war, trying to encourage sustainable growth while struggling to control inflation. Food prices are soaring, and the government said on Friday that the consumer price index had risen 5.4 percent, its sharpest increase in nearly three years. Hoping to tame inflation, in the last six months Beijing has tightened restrictions on bank lending to discourage borrowing and raised interest rates to encourage savings.
The government has also increased agricultural subsidies to curb food prices, and tried to forbid some Chinese companies from raising consumer prices. These efforts stand in contrast to those in the United States, where inflation is low and the debate centers on how much to stimulate the economy given the size of the deficit. Inflation is also running low in Europe, where some countries are imposing harsh austerity measures to pare their budget gaps.
But analysts say the results of this economic management have been mixed. Growth has begun to moderate from its torrid pace of about 10 percent annual growth but inflation has become worse.
For example, housing prices continue to climb even though Beijing has long promised to curb the property market and to spend billions of dollars over the next few years on affordable housing. The average apartment in central Shanghai now costs more than $500,000. Even in second-tier cities like Chengdu, in central China, the price of a typical home costs about 25 times the average annual income of residents.
Analysts say too much of the country’s growth continues to be tied to inflationary spending on real estate development and government investment in roads, railways and other multibillion-dollar infrastructure projects.
In the first quarter of 2011, fixed asset investment, a broad measure of building activity, jumped 25 percent from the period a year earlier, and real estate investment soared 37 percent. Some of the inflationary factors, like global commodity and food prices, may be beyond Beijing’s ability to influence. Gasoline prices have also jumped sharply, in line with global oil prices. As the world’s largest car market, China’s demand for fuel is soaring, and gasoline prices are close to $4.50 a gallon, up from $3.82 a gallon in late 2009.
The massive growth that China is experiencing is due to drastic measures in 2009 when Beijing initiated a $586 billion stimulus package that included loose sanctions on lending by state run banks. This led to record lending but added to the problem of skyrocketing property costs and increasing inflation.
