Low inflation in China - a study

Abstract

Abstract This paper comprehensively investigates inflation dynamics in China. First, we look at the accounting practices involved in case of China and their importance in measuring the output and input side factors accurately for the purpose of calculation. We investigate the demand supply gap in case of China since the early 90’s and the role of major components behind it. We look at the supply side factors in greater detail to find out the main causes of high growth in China. We study the different components of supply side such as overall investments and its components like GDI, government investments and household savings. Besides looking at the absolute numbers and percentages we also estimate their economic efficiency and actual contribution to the overall growth. We observe the pattern of demand growths in the same period which helped inflation keep within reasonable limits. Based on our analysis of the relationship between input and output prices, we measure the contribution of wages as a substantial determinant of inflation. We study the different policy issues undertaken by the Chinese government to sustain high growth and simultaneously contain inflation. We also study in brief the role of China’s highly criticized exchange rte management policy in this scenario.