Macroscope | Why China may finally become an exporter of inflation
- A deflationary force to its trading partners for a long time, China has kept inflation in check largely because of its pool of cheap labour
- But urbanisation is slowing, population growth is collapsing and addressing rampant inequalities is on the government’s agenda
Over the past few decades, China has been a deflationary force to its export destinations through its seemingly unlimited cheap labour and subsidised credit. But that role may be reversing.
China has a long history of high inflation and the past two decades of low inflation is really an aberration. As soon as China started its economic reforms in 1978, its citizens began to struggle with rapid price increases that lasted two decades.
In some years, the official figures for consumer price inflation reached double digits, topping out at 19 per cent in 1988-1989, and 24 per cent in 1994, for example. All the while, the government had to resort to data manipulation and draconian controls to hide the true extent of these price increases.
Right after 1949, China practised three decades of rigid price controls under the Communist government. That led to an ideological delusion that China would somehow never have inflation. University students and academics in the late 1970s and early 1980s (yours truly included) wrote numerous theses to support and justify this delusion.
But rampant inflation raged through China in the 1980s, despite official denials, forcing the establishment to admit a decade later that inflation was possible in China “under certain circumstances”.