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Policy balance between inflation, growth sparks debate

(Xinhua)
Updated: 2008-07-08 14:09

Chinese economists are debating whether it should still be most important to curb inflation when the country faces a cooling economy at the same time.

"The principal goal of macro-economic policies should not be to curb price rises only, but to achieve a proper balance between pursuing economic growth and curbing inflation," said Xia Bin, director of the financial department with the State Council's Development Research Center at a conference in Beijing last weekend.

If the government views curbing inflation as the only goal and sharply cools the economy and reduces demand, it will cause huge problems as there are about 10 million new job seekers every year in China, said Xia.

"Besides, stepping on the brakes suddenly, regardless of cost, is not beneficial for the world economy."

Professor Xu Xiaonian of the Euro-China International Business College urged "decisive, resolute" action to prevent "a vicious spiral of inflation.

"In anticipation of inflation, workers will demand higher pay, suppliers will ask for price rises, forcing enterprises to increase product prices, which will in turn stoke expectations for inflation," said Xu.

He suggested interest rate hikes and a larger appreciation of the yuan, the Chinese currency.

However, speeding up the rise of the yuan would worsen the pains for China's export industries, which are already facing a difficult environment, said chief economist Ma Jun of Deutsche Bank Greater China.

Exports in the first five months rose 22.9 percent from a year earlier, but the growth rate was down 4.9 percentage points.

China has been focusing on curbing prices since the consumer price index hit an 12-year high of 8.7 percent in February. It eased to 7.7 percent in May, but that was still above the government target of 4.8 percent for the whole year.

Curbing inflation should still get first priority, while major economic fluctuations must be avoided, Premier Wen Jiabao said during a weekend trip through the eastern Jiangsu province and Shanghai.

The biggest risk for the economy is still price pressure, the financial research institute of the People's Bank of China, the central bank, said in early June.

Leading economist Li Yining said on Friday that China faces the looming challenge of stagflation, when both unemployment and inflation are high.

The experts might disagree on policies, but they agree prices will keep rising.

Xu said he believed inflationary pressure would persist as long as international oil and food prices keep surging.

Xia predicted commodity prices would remain high for the next two to three years, with the economy slowing.

As the biggest economy in the world, the United States should offer to reduce demand, stop the depreciation of the dollar and further increase interest rates, said Xia.