China and Inflation 2.

            Inflation surged in much of the world during 2021 and the first months of 2022.[1]  Eurozone inflation reached an annual rate of 7.5 percent in April 2022; in the United States the inflation rate hit 7.5 percent in 2021 before climbing to 8.5 percent in March 2022. 

            But not in China.  For thirty years to government has held inflation in check, with an average of 2.6 percent price rise per year over the last ten years.  The Chinese government has continued the effort in the face of the current wide-spread inflation.  There the annual inflation totaled 0.9 percent in 2021 and climbed to 1.5 percent in March 2022.  The government has set a target cap of 3 percent for 2022. 

            Why is China so determined to check inflation?  The link between inflation and political unrest has been suggested as a chief motivation for China’s stronger line against price rises.  Run-away inflation in the 1930s and 1940s undermined the legitimacy of the Kuomintang government.[2]  A sudden rise in consumer prices during 1988 is sometimes suggested as one of the contributing factors in the Tiananmen Square demonstrations in 1989. 

How has China managed this feat?  China’s economy differs from Western economies in several ways.  First, investment, rather than consumer demand, is the most important driver.  The Chinese government has far greater control over investment than is common in Western countries.  Second, China’s response to Covid involved far less stimulus than was the case elsewhere.  This pumped much less money into the hands of consumers to either spend or save for later spending. 

            China has sought to fend off importing inflation from other economies.  It hasn’t been easy.  Russia’s war in Ukraine has helped push up world prices for carbon and grains, both major Chinese imports.  As a result, producers who transform raw materials into consumer goods have experienced a sharper rise in costs and prices—8.3 percent between March 2021 and March 2022—than have consumers. 

            While the United States maintains a strategic petroleum reserve, China has stored all sorts of key resources.[3]  This has allowed the government to counter the rise in import prices to a degree.  So, too, has the Chinese government’s large stake in the economy through state-owned firms.  These can be ordered to absorb some of the rising costs, rather than passing them on to consumers.  The government also limited steel exports to damp-down domestic price rises. 

Can China sustain its success?  All prediction is reckless.  Still, several observations may be valid.  First, China has unusually large reserves of strategic goods.  Those reserves aren’t unlimited.  Second, China depends on imports of food and energy.  What happens in the rest of the world will have something to say about what happens in China.  Third, Western countries have their own unpleasant memories of inflation from the 1970s.  The turn to resisting inflation in the West offers real hope that China will be able to ride out its current difficulties. 


[1] Stella Yifan Xie, “Beijing Uses Its Pull to Tame Inflation,” WSJ, 9 May 2022. 

[2] See Chang Kia-Ngau, The Inflationary Spiral: The Experience in China, 1939-1950 (1958). 

[3] There is a National Food and Strategic Reserves Administration.  For example, it stores aluminum, copper, rice, wheat, and soybeans.  If you don’t mind digging around a bit, you can learn more at https://news.knowledia.com/US/en/topics/AToxS