For China’s rulers through the ages, stability has been the chief objective.
The same is true for the Communist party today. For the current government, however, economic stability matters most of all. Yet observers of the Chinese economy, both at home and abroad, now worry that what looms ever closer is instability in its most dangerous guise – that of inflation. Are they right to do so? Probably not, is the answer.
Consumer price inflation did hit 6.5 per cent year-on-year in August, the highest rate in 11 years, largely because of a 49 per cent surge in meat and poultry prices. One much-respected Chinese economist remarked last month that "we have entered a very delicate stage of our development". He is convinced, moreover, that true inflation is far higher than what he regards as the government’s over-optimistic figures.
Albert Keidel of the Carnegie Endowment for International Peace takes a similarly alarmist view. He writes that "China’s economy today looks much as it did before the inflationary catastrophes of 1988-1989 and 1993-96". The first of these episodes contributed hugely to the protests that culminated in Tiananmen Square in Beijing in 1989. The second ended up with inflation at more than 20 per cent, the sacking of the governor of the central bank and a big jump in interest rates.
Mr Keidel makes three points: first, while the price increases have indeed been limited to food, these remain of large importance to Chinese consumers, particularly to the urban Chinese; second, inflation is already visible in the data on nominal gross domestic product, which is growing at between 6 and 7 per cent a year faster than the government’s estimates of real GDP; and, finally, real interest rates on deposits are negative, which is likely to encourage the Chinese to spend at least a part of their huge holdings.
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