Saturday, March 08, 2008

Can China Curb Inflation

Sources: BusinessWeek, Financial Times

China has committed herself to reigning in inflation, but experts believe this will be daunting task. Controlling inflation, which stood at 7.1 percent in January, is important to prevent the economy from growing too fast and “overheating.” Wen Jiabao, the Chinese prime minister, delivered his annual report to the legislature on Wednesday, which laid out policies to control prices. The report also promoted a more conservative fiscal policy. Nevertheless, education and health spending is expected to increase dramatically. Prime Minister Wen aims to bring inflation to a more manageable 4.8%.

January’s extremely high inflation rate has been blamed on the rise in agricultural prices. The bitter winter led to expensive food products. Nevertheless, there are fears that the expensive food products will “create an inflationary spiral that would be hard to contain.” Government plans include policies that would increase agricultural commodity production, ration grain use, and more closely monitor demand needs. Inflation has hit the poor the hardest, and the government has committed to ensuring basic food supplies would not be interrupted, and subsidy increases are forthcoming.

Question: The world economy is expected to slow dramatically over the next few months—yet China’s economy is speeding along, with the government aiming for a GDP growth of 8 percent in 2008. Can China maintain the rapid growth, and—can China stem inflation in the face of the faltering world economy?

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