Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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