Stable CPI shows China on way to quality growth

A key meeting of the Political Bureau of the Communist Party of China Central Committee on Tuesday signaled that China will focus more on maintaining the stability of the economy in the second half of this year amid external uncertainties.

Some are worried that to prop up China's economy, the more proactive fiscal policy and rising investment in infrastructure will eventually lead to rising commodity prices and affect ordinary people's livelihood. But the policymakers' decision to resolutely deleverage should ease such concerns.

According to the official data, the national consumer price index increased 2.0 percent in the first half of 2018. And although the CPI increased by 0.6 percentage points year-on-year, it was still at a comparatively stable level. The nationwide per capita disposable income was 14,063 yuan ($2,059) in the first six months, up 8.7 percent year-on-year. The actual increase in per capita disposable income, after deducting the price factor, was 6.6 percent, reflecting a stable growth trend.

The comparatively stable CPI is conducive to not only a stable increase in people's disposable incomes, but also better macroeconomic performance.

In the first half, China's GDP grew 6.8 percent year-on-year, which means the GDP grew in the range of 6.7 and 6.9 percent for the 12th consecutive quarter.

The CPI has shown a moderately increasing trend in the first six months. Food prices and nonfood item prices are two major factors that have an impact on GDP. But the increase in food prices was comparatively stable suggesting the CPI would remain relatively stable, while non-food item prices, which are the main force driving up the CPI, would increase steadily.

In the non-food sector, service prices increased 2.7 percent. In particular, the prices of medical care, and household and elder support services, increased 6.4 percent, 5.4 percent and 3.7 percent, respectively, showing an increasing trend.

The increase in food and nonfood prices will continue to fluctuate in the future, reflecting the changing pattern of Chinese people's consumption－from "eating well" to "living well"-due to the steadily improving Chinese economy and rising living standards of the Chinese people.

Domestic demand played a crucial role in China's GDP growth in the first half, with people's consumption determining demand, and people's rising incomes determining their consumption habits. The growth rate of per capita disposable income was higher than the per capita GDP growth rate, playing a positive role in boosting domestic demand and promoting economic growth.

Urban residents' average per capital disposable income reached 19,770 yuan in the first half, indicating a nominal growth of 7.9 percent year-on-year with the actual growth, after factoring in price rise, being 5.8 percent. And rural residents' per capita disposable income was 7,142 yuan, showing a nominal growth of 8.8 percent year-on-year while the actual growth, after factoring in price rise, was 6.8 percent.

Although the gap in the per capita disposable income of urban and rural residents narrowed, the income gap between and the dual income structure of urban and rural residents were still very obvious. Data show that Chinese residents' Gini coefficient, which indicates the difference in income distribution, was more than 0.4 reflecting a large income gap.

Therefore, the continuously rising rural residents' income and the narrowing of the income gap between urban and rural residents will help boost domestic demand and promote economic development. The need for the government is to implement an effective income distribution policy to further enhance people's sense of gain and happiness.

China has the world's largest middle income group. So the government's income distribution policy should promote the development of the middle income group. Individual income tax reform and the measures to promote equitable basic public service, improve social security and education systems, and create fair employment opportunities are all aimed at narrowing the income gap between urban and rural residents, as well as at increasing their disposable incomes.

It is possible to take these measures because a stable CPI is conducive to improved macroeconomic performance, and the trend of rising residents' incomes and improving income distribution is crucial for China's high-quality economic development.

The author is a research fellow at the National Academy of Economic Strategy at the Chinese Academy of Social Sciences.