China and Inflation.

            The ability to provide a rising standard of living to ordinary people forms one, but only one, of the central pillars of the legitimacy of the Chinese government.  Off and on over recent decades, the government has used subsidies and informal price controls to hold down inflation. 

Relatively low labor costs and stable prices have helped make China’s economic strategy work.  China has thrived on the export of cheap goods.[1]  Inflation would make those goods less cheap.  China has thrived on the import of food and raw materials.  Inflation would push up the cost of those imports.  Passing along costs to middle-persons or consumers could choke down domestic prosperity. 

A relatively under-valued currency also helped make China’s economic strategy work.  An under-valued (priced) currency makes that nation’s goods more competitive on foreign markets.  It also makes foreign goods more expensive to China.  China has long preferred to maximize foreign sales of finished goods.  That has required China to find ways to hold down production costs from comparatively expensive imports of food and raw materials.  Inflation would force China to choose between holding to an under-valued currency and currency appreciation.  What do you want more, the sales or the raw materials and food? 

More than a year ago, many observers warned of a global wave of inflation looming on the horizon.  Many factors contribute to these price increases.[2]  In May 2021, the Chinese statistical agency warned that prices for key goods had risen by 9 percent in the previous year. 

It could be argued that the government still had some time before taking action against inflation.  The covid pandemic had slowed down exports to much of the world.  Lock-downs in China had reduced production, even while logistical bottle-necks has caused a back-up in foreign ports.  The prices of many goods had not risen or had risen by small amounts.  In short, there was some slack in the economy.  This could be taken up before the government had to start pumping the brakes a little. 

China’s government wasn’t buying it.  The government responded with new subsidies for small businesses, which have smaller profit margins than do big business, and by restricting futures trading in hopes of reducing stockpiling of goods (“hoarding” or “speculation”).  Bigger businesses would just have to eat the rising cost of American wheat and Australian iron-ore.  These measures seemed to be kinda-sorta working by early June 2021. 

In addition, the government has allowed the foreign-exchange value of the currency—the renminbi—to appreciate against other currencies.  Both oil and wheat imports are denominated in dollars.  A stronger currency gets China the same amount for less or more for the same amount.  In Spring 2020, the renminbi was trading at 7.1 to the dollar.  By Spring 2021, it had risen to 6.4 to the dollar.  If foreign purchases did not shrink as prices rose, then some of the costs of China’s strategy could be exported to its trading partners. 

China looks like a predatory power, selling cheap to take over markets and exporting inflation when necessary.  Still, countries have policies for their own gain, not to help others. 

[1] Keith Bradsher, “In Battling Inflation, China Decides Not to Wait,” NYT, 10 June 2021. 

[2] Notable causes are said to be over-loaded shipping and port infrastructure and rising oil prices as the world’s economy rebounds from Covid.  Often left unsaid by the NYT is the great money creation by central banks as part of the response to Covid’s economic effects. 

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