Inflation or Economic Growth — Which Do We Choose?

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2008-3-8 16:08:38
Column: Expert Perspectives

For the real economy, the greatest problem before us is that we absolutely cannot allow China's economy — which has been growing at high speed for 30 years — to fall into a truly major adjustment. Just as there is no stock market that rises forever, economic activity cannot possibly maintain one rhythm indefinitely. We once enjoyed a super-blissful period of high growth with low inflation. However, this economic rhythm will not last forever. Once it changes, how we face and choose will be a completely unavoidable question.

Let us not mince words: this rhythm of high growth with low inflation is facing powerful challenges from both the broader international economic environment and our own structural development pressures. If we can overcome these challenges and continue maintaining this economic rhythm, that would of course be the most ideal situation. But reality often differs enormously from the ideal. In the event that the most ideal scenario cannot materialize, the real economy will increasingly need to face an unavoidable question: do we choose inflation, or do we choose economic growth?

If the beautiful situation where both fish and bear paw — high growth and low inflation — could be had is now under serious threat, then once we fall into a situation where we cannot have both, whether to take the fish of low inflation or the bear paw of high growth is indeed an extremely crucial question.

Regarding the two options of inflation and economic growth, there is a complete classification with only four choices: high inflation / high growth; high inflation / low growth; low inflation / high growth; low inflation / low growth. For a long time, we basked happily in the sunshine of low inflation / high growth. But this state cannot exist forever — meaning the other three options increasingly have the possibility of becoming reality.

So what should be the scenario we most fear and least want to face? Obviously, it must be high inflation / low growth. This would undoubtedly be the most terrifying and unacceptable scenario. Once it occurs, China's entire economic and social structure would face unprecedented, enormous pressure — the emergence of this scenario would be extremely lethal. Therefore, this situation must absolutely not be allowed to occur — this becomes the most critical task of economic regulation.

Low inflation / low growth generally does not occur in a developing country at China's current stage. Therefore, if high growth / low inflation cannot continue, the only remaining best choice is obviously high inflation / high growth.

In other words, if the happy situation of low inflation / high growth cannot be sustained, then we would rather choose high inflation / high growth than ever fall into the dead-end of high inflation / low growth. Put differently: maintaining high growth is the first priority. Only by regulating inflation on the basis of maintaining high growth is there a viable path.

Inflation obviously must be controlled. But the approach of attempting to forcibly suppress inflation by sacrificing economic growth is not only unrealistic — it ultimately cannot be realistic — and is very likely to push China's economy into the dead-end of high inflation / low growth.

China's current inflation problem is essentially caused by the incompleteness and irrationality of China's existing economic structure. And this incompleteness and irrationality happens to give hostile foreign forces and speculators an opening. Just look at the massive global speculation in all resource-class and even agricultural-class assets over these past years, and you'll see that all of it precisely targets China's economic soft underbelly. And who can we blame? A great nation that cannot even produce basic agricultural products domestically and must rely heavily on imports — is it possible that others wouldn't exploit and speculate against you?

Let us not mince words: this round of global resource-price speculation is to a very large extent targeted at China's economy. Precisely because our economic development model and structure have given this global speculation ample room to operate. And this brazen speculation is obviously a necessary and integral part of a comprehensive strategy to contain China's development. This point absolutely cannot be dismissed with the label of "conspiracy theory."

Last year, when the market was feverishly discussing so-called excess liquidity, this column explicitly pointed out that so-called excess liquidity simply does not exist. Too much water only proves the pool isn't big enough — it is merely an illusion created by the imperfections of China's economic and capital market structure. Damming up the water can only be temporary. The key is to enlarge the pool and perfect the basic economic structure — that is the root, not getting obsessed with peripheral issues.

Facts have proven that tilting at the windmill of excess liquidity cannot solve fundamental problems. Instead, it has squandered the heaven-sent opportunity to leverage the market's positive momentum to expand our absorptive capacity and rapidly upgrade China's capital-absorbing ability.