The sharp rise in oil prices in recent years, accompanied by a substantial climb in the prices of food and most raw materials, the depreciation of the US dollar and the appreciation of the yuan, have all had a significant impact on the Chinese economy. A survey of the major publications of China's leading economic research institutions offers interesting insights into their perceptions and assessments of the global economy.
In the first place, the influence of Marxism-Leninism retains a certain grip on China's economists; they tend to argue that even advanced capitalist countries cannot avoid the dictates of global economic cycles. A recession in the US is to be anticipated; the questions are: how serious and how long?
The Chinese economy has been export-oriented since the late 1980s and therefore highly dependent on foreign trade, which accounts for more than 70 per cent of gross domestic product - higher than those of the US and Japan. In recent years, Chinese leaders have called for a cut in trade dependence, saying that the stimulation of domestic consumption should be the key to maintaining long-term economic growth.
In view of the highest inflation rate since the mid-1990s, Chinese people have become more frugal. Mainland economists believe that domestic consumers feel they should save more for their children's education, health care and housing, so they are spending less when shopping.
At the same time, a vast majority of peasants are too poor to raise their consumption level. As a result, stimulation of domestic demand has to rely on investment, of which an excessively high level is concentrated on large-scale infrastructure projects in the public sector. The rebuilding efforts after the Sichuan quake will continue to sustain this high level of investment.
The high costs of oil and other raw materials may not lead to stagflation, because growth will be maintained at a healthy rate. But macroeconomic adjustments will become very difficult. China needs at least 7 per cent or 8 per cent growth to generate employment. A credit crunch to suppress inflation cannot last too long. This is why the banking and stockbroking industries cannot anticipate an expansion of money supply later this year to stimulate the economy.
