On October 20, 2010, the People's Bank of China made an interest rate hike that surprised the outside world.
Currency was over-issued by 43 trillion yuan
According to data disclosed by the National Bureau of Statistics, my country’s CPI increased by 3.6% year-on-year in September, a 23-month high; food prices that month were even higher than the same period last year. The increase is as high as 8. So, is the gradual year-on-year increase in CPI caused by excessive currency issuance?
“Inflation is a monetary phenomenon at all times and everywhere” - this is a classic saying of Friedman, the founder of the monetary school. According to the basic principles of monetary science, for every 1 yuan of economic growth in a country or region, the central bank as the currency issuance agency should also supply 1 yuan of currency. Money supply exceeding 1 yuan is regarded as over-issuance. In emerging market countries, due to market-oriented reforms and other reasons, the resource commercialization process has intensified, and it is reasonable for the broad money supply to be moderately higher than the GDP growth of economic development. But an excessive money supply can easily lead to inflation.
The relationship between inflation and excessive currency issuance has also been recognized by many Chinese scholars. Zhou Qiren, an economist and member of the Monetary Policy Committee of the People's Bank of China, warned in his blog that "the currency tiger is getting bigger and bigger."
According to statistics, at the end of 2009, my country's GDP scale of 33.54 trillion yuan was 92 times the GDP scale of 364.52 billion yuan in 1978. However, during the same period, the broad money supply (M2, broad money = cash in circulation, bank current deposits, savings deposits, securities company customer margins) increased from 85.945 billion yuan in 1978 to 60.62 trillion yuan at the end of 2009, which was 705 times.
Wu Xiaoling said bluntly: "In the past 30 years, we have promoted rapid economic development with excessive money supply."
According to official data, in 2000, my country's total GDP was 8.9 trillion yuan, and the broad money supply was 13.5 trillion yuan, which was 1.5 times the GDP, 4.6 trillion yuan more. By 2009, my country's total GDP was 33.5 trillion yuan, and the broad money supply was 60.6 One trillion yuan is 1.8 times GDP, which is 27.1 trillion yuan more than the difference.
From a trend perspective, the ratio between broad money supply and GDP is further increasing. According to data from the central bank, at the end of September, the balance of broad money had reached 69.64 trillion yuan. Based on the GDP in the first three quarters released by the National Bureau of Statistics of 26.866 trillion yuan, the excess currency was nearly 42.774 trillion yuan. UBS pointed out in its latest global economic research report that China's CPI inflation is mainly driven by food, especially vegetable prices, and is not obviously the result of excessive currency issuance. UBS expects the year-on-year CPI growth rate to be around 5 in November, but will fall slightly by December.
In order to control inflation expectations and prevent rising food prices from spreading to the overall economy, raising interest rates and liquidity, management can and should play a key role. UBS expects to raise interest rates once this year and two to three times in 2011. It also expects the central bank to increase its hedging operations and appropriately lower its credit growth target (new loans of 6.5-7 trillion yuan). UBS believes that so far, the rise in CPI has been mainly driven by food price increases, while non-food prices and "core" inflation rates have remained stable. Vegetable prices have risen sharply in the past few weeks as bad weather and natural disasters have affected crop harvests, especially vegetables. In addition, rising diesel and transportation costs (power cuts have forced many companies to switch to diesel generators, resulting in a "diesel shortage") have led to price increases for other agricultural products.
In addition, have rising manufacturing wages led to higher prices? UBS said it had seen little sign of higher consumer product prices as a result of rising wages. In fact, non-food price inflation remains quite subdued, and its small increase was mainly driven by housing costs (and cotton-related clothing costs in October). The weight of living costs in the CPI is about 14, mainly including utilities, rent and virtual rent, construction and decoration materials.
UBS pointed out in the report that the market is overly worried about macroeconomic control and tightening of monetary policy. UBS chief economist Wang Tao said that the outlook for inflation and economic growth will be different in 2007-08, and the government will also take into account a weaker global growth outlook when formulating policies. The government's initial policy response to inflation mainly included supply-side measures and attempts to manage inflation expectations. UBS does not expect the government to immediately adopt widespread price controls as it did in 2007-08. When food prices soared in 2007-08, the domestic economy grew rapidly (China's GDP growth rate reached 14.2% in 2008) against the background of the simultaneous rapid expansion of the global economy. The strong investment impulse of local governments may further boost economic growth. rates and inflation rates. Supported by economic stimulus policies, GDP growth has stabilized at 9-10. At the same time, the outlook for global economic growth remains unclear. Compared with the inflation rate of 8-9 in early 2008, the CPI level of 4-5 is also relatively mild. Furthermore, as mentioned earlier, the source of rising food prices is not primarily from staple grains and meats, as was the case in 2007-08, but was driven by skyrocketing energy prices and spread easily to many other products.
Based on this, UBS maintained its 2011 GDP growth forecast of 9, but raised its CPI forecast from 3.5-4 to 4-4.5. In the medium term, UBS believes inflation is likely to remain at an annual average of 4-5, as energy and agricultural prices will rise. Inflation has become one of the biggest challenges facing our country's economic development. According to the monetarist point of view, inflation is a monetary phenomenon anytime and anywhere. The implicit meaning is that as long as the currency issuance exceeds the market value of all commodities, inflation is inevitable. For China, excessive currency issuance is obviously one of the important factors leading to the current increasingly severe inflation problem.
Of course, we can find many reasons for the over-issuance issue. Such as local investment impulse, redundant construction and various development projects. Among them, the foreign exchange balance formed by the huge foreign trade surplus is undoubtedly one of the most important factors. Research shows that the export-oriented strategic transformation of one-sided pursuit of trade surplus has been too slow, resulting in excessive growth of foreign exchange reserves and a huge demand for base currency. After years of accumulation, it has reached a period of concentrated outbreak of problems. This is the main reason for high inflation expectations.
my country’s inflation shows typical characteristics of imported inflation. If we look at the root cause, it is time for the traditional export-oriented development strategy to undergo transformation. In a period of capital scarcity, it makes sense to take various measures such as tax incentives, free use of land, cheap labor, etc. to vigorously develop export-earning industries and pursue trade surplus. However, after more than 30 years of reform and opening up, China's capital scarcity situation has greatly improved, and it has entered a period of flooding liquidity. If the development strategy of blind worship of foreign capital does not change, China's imported inflation will inevitably become more intense.
Therefore, in order to solve the problem of excessive trade surplus and the excessive foreign exchange reserves caused by it, it is first necessary to change China's export-oriented development strategy and curb the excess foreign demand caused by low-price export goods. In recent years, the phenomenon of low-price exports of my country's export commodities has continued unabated. Not only has the scope of export commodities in low-price competition expanded, but also the number of enterprises participating in low-price competition has continued to increase.