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In China, time to tighten

Economist        Is inflation or deflation a greater threat to the world economy? Should policymakers focus more on structural adjustments or aggregate demand?      In China, time to tighten    He Fan our guest wrote on Jun 1st 2010, 17:20 GMTINVESTORS        In the global market may begin to worry about deflation, but in China, inflation is still the major concern. There are clear signals of overheating. The GDP growth rate climbed to 11.9% in Q1 2010. For a country which has significant surplus labour, China is now facing an acute labour shortage. Remember, the labour market for migrant workers in China is the most “liberal” one in the world, and this market is more reliable for diagnosing the macroeconomic situation than official statistics.    The root reason for the inflationary pressure is ultra-loose monetary policy. China launched a massive stimulus package to spur the domestic economy in late 2008, but the lion's of share of these public investment projects have been fueled by bank loans. Money flows into infrastructure projects, and also the property market. In the first month of this year, housing prices in Beijing increased by 20%. Faced with mounting public pressure, the government took all kinds of measures to stop the further increase of housing prices. It has had some temporary success. But guess what: the price for garlic and mung beans started to soar. Recently, the stock market tumbled, out of fear of a more stringent policy adjustment. But investors will soon realise that they have overeacted, and there is no other place to put their money. Then, all the money will flow back, and a stock market bubble may follow the housing bubble.    The best choice is further tightening of monetary policy, say, an increase in the interest rate of 27 basis points. The Chinese government is hesitating, because they are concerned about the turmoil in Europe. But if they wait too long, CPI may rise to above 4% in Q3, and by then, it will be too late, and too painful to turn around.              http://www.economist.com/economics/by-invitation/guest-contributions/china_time_tighten

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