Analysis of Inflation Data in Modern China

Overview of data

The two peaks in the data correspond to 1989 and 1995, and the two lows correspond to 1999 and 2009. From 2000 to the present, there have been four episodes of inflation above 5%, in 2005, 2008, 2011 and 2020. Otherwise, inflation in China has remained almost constant at 0-2%.

Two peaks - price rises and the buying frenzy of the 1980s

For the early 1980s, China began to implement reform and opening up and the macro economy grew rapidly. Most of the foreign companies exchanged foreign currency for RMB and a large amount of foreign capital flowed into China, increasing the money supply. Inflation broke out again around 1986 as a result of policy adjustments, transparency in commodity prices and the introduction of wage reforms, and irrational factors in the old price system and economic institutions. China's economy continued to overheat as a result of inaccurate regulation of the economy. However, the government chose to carry out a comprehensive price reform, which triggered one of the biggest buying booms in China. For the first time in China's history, prices continued to rise as demand outstripped supply, the underlying cause being that China had little experience of economic regulation and was still feeling its way. Unreasonable price reforms caused consumers to flood the market, creating a situation where demand exceeded supply.

Unlike the inflation of 1987-1989, consumer demand grew more modestly in 1993-1995, but investment demand increased more. It started because of the market economy reforms launched at the end of Deng Xiaoping's Southern Tour speech. Commodity pricing was fully opened up, price subsidies for workers were raised and wages were increased. Local governments made a big push to build development zones, enterprises invested in expansion and demand for production materials pushed up. More people borrowed money from the government and a large amount of money flowed into the market thus leading to a second serious inflation. Eventually the government regulated the market by raising interest rates on deposits (up to 12%) and rolling back the money.

Two low peaks - the impact of the financial crisis on the Chinese market

Representative views of economists on the deflation that occurred in China during 1998-1999：

(1) Insufficient demand

(2) Excess supply

(3) Low economic efficiency of enterprises

(4) Structural deflation

I think it is important to look not only at the amount of deflation in China, but also at the amount of inflation that rose in China between 1993 and 1995. This was partly due to the Chinese government's economic control, but partly due to the Asian financial crisis in 1997, which led to the deflation.

The deflation in China around 2009 was very similar to the deflation that developed around 1998. The cause of the deflation in China in 2009 was caused by the international financial crisis in 2008. One of the main causes remains the lack of demand and overcapacity in China. Secondary causes were the decline in international commodities and the formation of new business models.

The reason why the financial crisis was deflationary in China was because Chinese investors were overly panicky about the crisis. The financial crisis led first and foremost to a fall in the value of assets, most notably stocks and real estate, which were the hot investments in China before the financial crisis, from the stock boom of the 1990s to the great bull market of the pre-2008 period.

The outbreak of the financial crisis will reduce people's confidence in their assets and investments, thus discouraging consumption and investment spending. Banks, for their part, may hedge their bets and cut back on lending. This will lead to deflation in China.

Around 2005

The reasons for the formation of inflation during this period are more complex, due on the one hand to the sharp rise in non-energy commodities on the international market in 2004, and on the other hand to the massive flow of domestic capital into real estate, as well as the sharp rise in the price of food on the international market that led to this inflation.

Around 2008

Inflation in China accelerated sharply in 2007, with domestic prices rising sharply, while the snowstorms in the south-central and south-western regions during the Chinese New Year in 2008 caused serious damage to local infrastructure and massive agricultural failures, which led to a rapid increase in price increases. Internationally, the Chinese market was also affected by high oil prices, reduced wheat production and the devaluation of the US dollar. The Chinese market was the main indicator of the increase in the CPI, with a 21% increase in food.

Around 2011

The main causes of inflation in China in 2011 were due to the over-issuance of the currency and the rise in commodity prices on the international market. Food and housing prices were the main drivers of inflation, with food prices rising by 11.7% in November 2010, contributing 74% to the CPI increase. The rapid growth in the money supply was another factor in the formation of inflation. As a result of the financial crisis in 2008, the central bank increased the money supply and in January 2010 the growth rate of money reached a record high of 38.96%, thus accelerating inflation.

Around 2020

The global outbreak of the epidemic around 2020 and the strict protective measures taken by countries have disrupted the movement of people and goods. Production in industrialised countries stagnated, leading to a spike in the price of raw materials. The shortage of supply leads to an increase in prices.

Summary

Apart from the two peaks which are influenced by national economic regulation, inflation in China from 2000 to date has been more influenced by international economic patterns and international prices. The moderate rate of CPI increase in China in recent years indicates that the country is in a relatively healthy economic system and that China's economic control policies are becoming more mature and stable.