The combination of soaring consumer prices at home and the worsening global economic outlook has ostensibly added a further complication to China’s endeavor to keep economic growth on track while preventing overheating.
As the world’s second largest economy, China will have no chance of maintaining its growth momentum amid a global recession. So Chinese policymakers will have to keep a watchful eye on external weakness and the volatility of global markets.
But with inflation still too high for comfort, it remains far too early for a policy about-face, even though China has introduced five interest rate hikes since October 2010 and frequently increased government curbs on lending and investment.
The latest statistics show that the country’s consumer inflation hit a fresh three-year high at 6.5 percent last month, well above the official 4 percent target for the year.
The July figures should effectively refute the optimistic forecasts that inflation would peak around midyear in the absence of any new price shocks, thanks to base effects turning favorable and the impact of previous tightening measures beginning to kick in.
But with foodstuffs accounting for about one-third of the monthly spending of the average Chinese consumer, the stubbornly high food prices, which went up 14.8 percent year-on-year in July, should put an end to any complacency and the belief that the country can easily win the battle against inflation.
Admittedly, the rapidly darkening global growth prospect may add desired downward pressures on China’s consumer inflation by lowering international commodity prices, a key source of domestic price hikes.
In Asia, oil prices tumbled to below $78 a barrel on Tuesday, almost the lowest in a year, as global investors feared the worsening outlook in the United States and the European Union may touch off a global recession. In fact, the price of crude has fallen about one third since reaching nearly $115 in May.
For an energy-thirsty country like China which imported 126 million tons of crude oil from the international market in the first half of this year, lower oil prices, in theory, will give its policymakers more leeway in their attempts to slow inflation.
Nevertheless, the current fall in the cost of oil and other commodities may be short-lived if debt-laden Western countries choose to print more money in an effort to hide rather than fix their fundamental fiscal and economic problems.
In that case, developing countries like China that are fighting a difficult war against inflation should brace themselves for another flood of excess liquidity in the international financial markets, liquidity that will exacerbate their domestic price pressures.
The expectations on China to repeat its role as a powerful growth engine are largely premature while the country’s inflation remains so hot.
The international community should understand that, from a long-term point of view, the value of China’s persistent efforts to tame inflation and pursue sustainable growth will eventually be borne out if the West falls into recession again.
