Marginal stagflation in China

I was asked the following question: 有人说中国将进入高通胀，低增长时代，老百姓要吃苦几年了，您怎么看？

 

The following is my reply:

I am at work and have to use English.


I think it is possible, given the amount of money in the system and the slow recovery of the west economies.

China will have to adjust its economic structure to use both trade and domestic demand as the combined source of growth for the future, say the next decade or so, then to move to rely mostly on domestic demand as the main source.

In such a period of transformation, growth may not be as fast as that in the past which had the world demand as the key source of growth until China can manage the growth of its domestic demand. It requires a fine balance of the relationship between capital and labour on the one hand, and the economic structure to meet the domestic demand.

But, China should encourage its citizens and firms to look at overseas to acquire assets as a tool to manage its domestic demand to release its demand pressure and to increase their wealth, which will make the management of the economy easier than otherwise.

There are many overseas assets market depressed and they represent opportunities. But it needs well managed as well.

To answer your second point, it will depend. The government should encourage labour are paid appropriately. Instead of appreciating the RMB to balance external trade that may damage employment, it should look at the export price side as a result of better paid labour. If labour wages increase, then it should not be too bad as long as inflation is under reasonable control.

But in terms of exchange rate regime, I think it is better to peg to a basket of key currencies, including $US, euro, Yen and others, based on trade relations.

There is a question of what to do with the $US assets.

PS: Yiping Huang has a post on marginal stagflation in China:
http://www.eastasiaforum.org/2010/11/12/is-china-entering-a-period-of-marginal-stagflation/