Beijing deflated by Inflation

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Chinese inflationary trends may hit the domestic and global consumer hard

In a democracy when the people are unable to bear the burden of ever increasing living costs, they retaliate by voting out the government and throwing out the politicians who fail to manage the economy on their behalf. But what do people in a dictatorial set-up like China do to give vent to their thoughts on the government’s apathy? In a totalitarian regime people keep accumulating their anger and burst out one day bringing about a revolution.

And now, when the annual inflation rate has more than tripled since last year to 4.8% and is expected to touch 6.8% in the current year, experts feel that it is becoming increasingly difficult for the Chinese Political bureau to strike a right balance between protecting the economic growth and ensuring public support to metamorphose completely from communist to capitalist modes of production. The big challenge is to make the process inclusive and not to alienate the common man. And the fear stems from the fact the growing burden of rising prices of essential commodities could destabilise the political set-up. “It’s better to nip inflation in the bud, but politicians’ concern is that if they take it seriously, it shows they haven’t managed the economy well. It might open them to criticism from political opposition within the party,” says Albert Keidel a former Beijing-based senior economist for the World Bank. It is not that the Chinese government has not taken steps to curb inflationary pressures. Premier Wen Jiabao has promised to keep keep this year’s consumer price index (CPI) increase at around 4.8%.

But the global economic situation coupled with high transportation costs is just not helping them to mitigate inflation. Furthermore, growing prosperity is creating consumers, eating humongous amounts to push up the demand.

The Chinese President Hu Jintao’s dream of constructing a “harmonious society” through higher wages and better health care system may prove to be an ineffective political risk management strategy, if inflation continues to spiral. Global economists too are worried about the Chinese inflation, as higher living costs in China will eventually lead to much higher costs of products being exported from China.

B&E edit bureau: Atul Bharadwaj

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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