China’s 9.7% GDP–No Easy Answer On Inflation

China’s GDP rose 9.7% in the first quarter. The nation’s consumer prices rose 5.4% in March compared to the same month a year ago.  Economists would argue that China could tame inflation by lowering the yuan exchange rate and tightening credit standards for bank loans. The situation, however, is far more complex.

China is caught in the rising tide of global commodities prices. Its huge demand for oil and agricultural goods may be one of the causes of this, but it is not the only one.   Like the rest of the world, the country’s economic fate does not rest entirely in its own hands.

Crop production in places like the US has become opportunistic. There is no reason to think that is different in other large agricultural producers like Canada. The intelligent farmer is just as much a force for higher commodities prices as demand from China. The more acres of cotton that are planted, the less space there is for wheat, corn or soy. The limits of arable land makes inflation almost certain.  Extreme weather conditions has made the situation worse because no large producer has been spared either from droughts or floods.  China may be able to escape some of this pressure by favorable currency exchange rates, but can’t avoid the problem entirely.

Economists argue that China’s inflation problem is due in part to the lingering effects of its huge stimulus package put into place three years ago. That may be true, and among other things it could have increased demand for crude and other commodities. The impact of stimulus will wear out if it has not done so already. Drought in the nation’s wheat producing areas and global oil shortages because of problems in nations like Libya will go on for months.

China’s inflation cannot be entirely controlled by government policy. Too much of the pressure comes from abroad.

Douglas A. McIntyre