China Should Safeguard the Stability of the Inflation Era
By: Paul Hu
Submitted: 2012-02-03 03:42:53 | Word Count: 713
China has entered the era of inflation. The next five years, the average inflation rate depends mainly on the case of monetary expansion over the past decade. Need to do now is to protect the stability of the inflation era.
Inflation does not mean instability. Many economies have experienced higher inflation, but economic growth did not stop. Maintenance of stability of the necessary conditions for the next few years will be the inflation rate to a level similar to the expected. The next five years, China's C PI average inflation rate is likely higher than 5%. The deposit rate, at least short-term deposit rates raised to this level as soon as possible, is essential. Otherwise, depositors can take money out, the hoarding of consumer goods, which will lead to inflation crisis. Priority to keep inflation stable, that is willing to continue to depositors in the bank deposits.
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If all prices rise together, no one is immune. However, the development of inflation in this way rarely. Often bear the pain of inflation, fixed income groups, such as pensioners, retired people. Inflation often reflects the government's financial burden, so that the assumption of debt (including pension liabilities and bank deposits) has shrunk, is often its unspoken goal. This is why inflation is often accompanied by social instability. However, the Chinese government's very strong financial capacity. Public sector revenue-GDP ratio in all the major economies is the highest. China's fiscal pressure from a strong desire to invest. If the Government can limit or slow down investment, the pension and other fixed payments and inflation remained at the same level, there is no financial difficulties.
Market forces will wage, especially blue-collar wages rose faster than nominal GDP. However, local governments often use administrative power to suppress wages and business together. This is a huge mistake, because the wage increase is to rebalance the Chinese economy, to shift spending away from investment in the best way.
China's personal income tax has been high. This led to enterprises, especially private enterprises, the general increase in tax deductible expenses as much as possible, reducing taxable wages. The corporate income tax is 25%, while the top marginal personal income tax is 45%, which makes some people's personal income tax does not exceed 25%. However, employees of large companies usually pay the highest tax rate under the pressure of rising wage inflation, the burden of large enterprises will increase disproportionately. In addition, high rates of inflation greatly reduced the barriers to entry. Invasion of personal income tax structure of inflation, exacerbated the negative effects of inflation. Government should top marginal tax rate to 25%, and corporate income tax rate unchanged, while income tax according to the inflation rate increased the threshold for each file.
Opposed to raising interest rates, believe that it will attract "hot money." I think not. Interest rates is not to attract "hot money" the only factors that may not be the main factor, especially in emerging economies. Ten years ago, the East Asian emerging economies, high interest rates attract foreign capital, but without success. Over the past few years, the same low interest rates and the economy does not need the implementation of foreign capital, but the "hot money" is still a flood. India's interest rates close to 10%, but not in China to attract "hot money" and more. "Hot money" should not be bound by China's rate hike.
As long as the Government is determined to crack down on the bubble, no matter how much the Fed's loose monetary policy, no matter how enthusiastic speculators, this situation will not happen. When an emerging economy by raising interest rates to show resolve to squeeze the bubble, "hot money" will be pulled out. As the last of China unexpectedly raised interest rates, the renminbi offshore NDF market to decrease.
China's current inflation, and the similar situation in 1994: are long-term accumulation of monetary expansion, and expansion trend could not be stopped because all investment projects must have beginnings and ends.
Measures need to be taken now and in the past like, holding stability policy is necessary to: (1), within the next five years the average inflation rate is expected to rise; (2), people living on fixed incomes (such as retirees and students) increase in benefits; (3) to allow market forces to determine wage growth; (4), reduction in personal income tax.
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