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The Changes of Anti-inflation Policy and the Choice of Recent Policy

Author: LiuNingSi
Tutor: DuLi
School: Jilin University
Course: Finance
Keywords: Inflation Macro-control Financial crisis Policy choice
CLC: F822.5
Type: Master's thesis
Year: 2009
Downloads: 360
Quote: 2
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Abstract


Inflation issue is very important in the fields of economic and financial research. It is a economic problem which has been summarized and researched for a long time, but has not been finally resolved. It relates to people’s lives, economic development and social stability of all over the world. Therefore, the research of inflation problem is of great theoretical and realistic significance.This article is divided into four chapters. Chapter One is exordium, it mainly describes the background and significance of this article, and reviews the classical western theories of inflation and the inflation study in our country. This chapter is the basis of the analysis and study.Chapter Two looks in retrospect at all the inflations that China suffered since the opening policy was adopted. The occurrence of the peaks in the CPI diagram indicates all the five inflations taking place in 1980, 1985, 1988---1989, 1994 and 2007---2008 respectively and reviews and analysis are conducted on them.The 1980 inflation occurred when, after the Gang of Four was smashed, the central government failed to correct the Leftist wrong ideas in time, but demanded that local governments of various levels accelerate development irrespective of the actual situation facing China. Such impatient plans resulted in many problems in economic performance including overscale capital construction, overheated investment, increase in investment goods, currency over-issue, fiscal deficit, trade deficit and consumption inflation stimulated by income inflation. All the above factors contributed to a 6% increase of retailing price in 1980 over that of the previous year and brought about a negative social influence. By the end of 1980, the central government adopted a series of effective policies and measures to adjust the economy and stabilize price, which mainly include: to reduce capital construction investment and other types of expenditure; to exercise a tighter control over price; to issue treasury bonds and borrow balance from local government; reinforce management of credit and cash and control credit lending. After those policies were carried out, the inflation was basically contained by 1981.Another inflation occurred in 1985 under such circumstances when the 12th National Congress of Central Committee of the Communist Party of China had proposed to double the production of agriculture and industry, and a new campaign for an enlivened and open economy was under way and there was an all-round upsurge in economic construction. Causes of the inflation chiefly are: fixed assets investment inflation had led to fiscal deficit; price reforms had caused increased market speculation; irrational expanse of credit scale due to credit system drawbacks and imbalanced relationship of supply and demand owing to consumption increase. The inflation came out of an economic system undergoing transformation. At the time China was in a rush for growth and under the incorrect concept market mechanism was introduced and price system reform was deepened. In order to curb the inflation the State Council adopted a tight monetary, financial and income policy, and in the meantime strengthened its control and supervisory examination on price and slowed down the pace of price reforms. The previous macro-adjustment pattern principally by the Planning Commission has been taken place by one jointly adjusted by the Planning Commission, treasury departments and the central bank.The 1988—1989 inflation took place when the central government’s tight policy had yet to produce effect and financial and monetary policy shifted from tight to liberal. Meanwhile, the central government pressed ahead with price and salary reforms. There were three causes of this inflation. First, the central government put forward the concept of breaking price limits which intensified people’s alarmed anticipation of inflation; second, investment demand inflation and consumption demand inflation co-existed and the general demand exceeded overall market supply; third, the central government failed to be fully aware of currency over-issue and circulation disorder but showed eagerness for price reforms. Therefore, the central government made a quick response with overall economic rectification, major measures of which include: control investment and consumption demand; tighten monetary policy and withdraw money from circulation; reduce the pace of price and wage reforms. This inflation lasted for three years; powerful macro-adjustment prevented inflation from deteriorating and kept economic growth at reasonable rate so that an economic hard landing was achieved.The inflation in 1994 took place against a background of finishing economic rectification when Deng Xiaoping made his famous speech down south. That was the most severe inflation since the reform and opening policy was adopted and it was even described as four heats, four highs, four tights and one chaos. The causes could be summed up as the following: first, over-expansion of fixed assets investment, over-speeding of consumption fund growth and brisk social demand; second, as a result of worsening financial difficulty, currency over-issue finally affected rise in price; third, price reform and structural restructuring pressed ahead and cost pressure boosted price increase; fourth, agriculture lagged behind in growth and price of farm and by-products went up sharply. For this situation the central government adopted moderately tight fiscal and monetary policy. Money supply was adjusted to contain investment and consumption and control the general demand. Meanwhile, circulation system reforms were carried further and established a system of important merchandise storage both at the central and at the local level. Price supervision and examination were enhanced and orderly circulation was restored. After three years’efforts noticeable results were attained and China had economic soft landing.The inflation during 2007 and 2008 occurred against a complex background. The country was confronted with not only internal influences from economic growth, system, structure and policy, but also external factors such as natural calamities and international economic environment. Despite the fact that the economic circles differ widely in the causes of this inflation, I think it could be attributed to the following two aspects: money and cost. On the one hand, the flowing surplus has led to huge inflation hazards; on the other, the rising cost of labor and raw materials poses the driving force of the inflation. For this, China has taken the following steps: first, arouse the public awareness of inflation; second, carry out a tight monetary policy; third, increase investment in agriculture and the countryside; fourth, make globally concerted efforts for a solution.Chapter Three is the prevention and control of inflation problem. This chapter analyses how to prevent and control the inflation problem in our country on the basis of summarizing the historical experiences of these five times inflation.About inflation prevention, there are three aspects should be paid attention to: the first one is to control the scale of money supply. One of the most effective ways of inflation prevention is to slow down the monetary growth rate, and determine interest rates according to market demand and supply of funds. The second one is to set up mechanisms to guide the direction of investment and to constraint the scale of investment. Avoid excessive expansion of aggregate demand. The third one is to improve strategic reserves mechanisms of key products and energy for our country. Protect the national security of energy and food.About inflation control, there are also three aspects should be paid attention to: First, prevention has less adverse effects and costs then control. Therefore, the government should remain the alertness of anti-inflation; strengthen the forward-looking of macro-control. Second, coordinate and cooperate the monetary policy and fiscal policy, gradually reduce the price control to ensure the objectivity and scientificity of Macro-control. Third, strengthen the international monetary cooperation, and enhance the economic discourse power.Chapter Four is the current economic situation and potential inflation prevention. Europe and the United States pushed out the huge economic stimulating plans and injected currency liquidity to spend the financial crisis. China also pushed out economic stimulating plans for four trillion. If governments expand the scale of economic incentives, the global liquidity surplus will become the economic problem that besets the world again in the future. Our country should maintain the vigilance on inflation and guard against the potential of long-term inflation.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Inflation
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