Download China`s Inflation and Hong Kong`s Deflation

CHINA Ruby News
Ruby Zhu, China Economist of the Hong Kong General Chamber of Commerce. Email: [email protected]
Vol II, No.12 December 2003
China’s Inflation and Hong Kong’s Deflation
n the July 2003 issue of China Ruby
News, we examined inflation in China
and its impact on monetary supply and
investment growth. After rising for 11
consecutive months since January 2003,
China’s Consumer Price Index (CPI)
peaked at 3 percent in November -- the
highest record since February 1997 and
significantly higher than the 1.8 percent in
October 2003.
I
With the CPI averaging a 1 percent rise
between January and November 2003,
China has been experiencing mild inflation.
Alongside the rising CPI, China has also
been experiencing a shortage of some
raw materials, coal and electricity. The
prices of minerals, such as copper, iron
and aluminium, have also jumped by as
much as 5 percent. All of these changes
signal that the Mainland economy has
been over-heating.
Unquestionably, the rising CPI, especially
the dramatic rises in prices for agricultural
produce and raw materials, stems from
the weaker renminbi (RMB) as a result
from the fall in value of the US dollar.
Once inflation takes hold, commodities’
prices rise and then further push up
consumer prices. Fortunately, the series of
tighter measures on lending implemented
by China’s central bank since June 2003
have slowed the supply of money in the
country.
By controlling inflation through tightening
banks’ lending policies, the Mainland
Government has slowed the country’s
economic growth. In November 2003,
China’s total imports rose 28 percent over
the same period in 2002, far lower than
the 40 percent for the first half of 2003.
However, as China is in the process of
transforming into a market economy, the
Central Government doesn’t want to see
any major changes in local business
conditions. Therefore, it will implement
macro control measures to avoid serious
inflation,
deflation
and
worsening
unemployment. We anticipate that inflation
in China will climb, at most, to 5 percent,
which is less serious than the 10 percent
inflation that China experienced in 1994.
Persistent deflation in Hong Kong since
1999 has dampened local growth and
citizens’ standard of living. Thanks to the
Closer
Economic
Partnership
Arrangement (CEPA) signed between
Hong Kong and the Mainland in the
second half of 2003, Hong Kong’s
economy has started to recover. As a
result, Hong Kong’s falling CPI has started
to lose some of its momentum. China’s
inflation has also helped reduce
deflationary pressure in Hong Kong as
most of our daily necessities come from
China. Nonetheless, this won’t be a cure
for Hong Kong’s deflation because
foodstuffs (excluding restaurants) make up
only 10.28 percent of our CPI, while that
of miscellaneous goods accounts for 5.7
percent. Even if external factors remain
stable, Hong Kong will only be able to
shake off deflation through a revival in
domestic consumption and economic
growth.
In 2004, China may have to face a
number of issues, in particular the
exchange rate mechanism of the RMB.
Last month we discussed the adverse
impact that the RMB’s appreciation would
have on the Mainland economy, and that
excessive devaluation of the currency
would also hurt the economy. If China
adjusts its foreign exchange regime by
pegging the RMB to a basket of
currencies, the fixed exchange rates of the
HK dollar to the RMB, through the US
dollar, will also change. If that happens, it
will likely suppress inflation in the
Mainland and keep prices of imported
commodities in Hong Kong low. It might
also attract more Mainland residents to
shop in Hong Kong, which would in turn
stimulate
domestic
demand.
Comparatively, the latter is expected to
exert a stronger influence on our
economy.
www.chamber.org.hk