China’s current inflation is a temporary bubble, and there is no need to worry about a hard landing, said Professor Dwight H. Perkins, a Harvard economist at a world economic congress held from Monday to Friday in Beijing.
“The inflation partially comes from outside factors, and China’s central bank is doing things to control money supply and inflation,” Perkins said. “China’s government should focus on slowing down the economy.”
On June 16, financier George Soros predicted a possible hard landing for Chinese markets due to a significant increase in supply offset by falling demand. However, China’s regulatory authorities have managed the situation well thus far, according to Soros.
A hard landing in the business cycle is an economy rapidly shifting from growth to slow-growth to flat as it approaches a recession, usually caused by government attempts to slow down inflation. It is distinguished from a soft landing, in which an economy’s growth rate slows enough to control inflation but remains high enough to avoid recession.
The Consumer Price Index (CPI), a main gauge of inflation, rose by 5.5 percent in May from the previous year, setting a 34-month high and was well above the government’s target ceiling of 4 percent for the year. Inflation data for June will be released on July 9.
The Chinese government has set a full-year target for inflation of about four percent.
Hundreds of the world’s renowned economists, including Joseph E. Stiglitz, Eric Maskin, Masahiko Aoki, Wu Jinglian and Lin Yifu, gathered at the 16th World Congress of the International Economic Association (IEA) at Tsinghua University. Some of them believe a hard landing for China’s economy is unlikely, although there have been recent concerns.
Wu Jinglian, the 81-year-old preeminent Chinese economist, said that there is a possibility for China to suffer a hard landing, but it can be avoided through focused efforts.
“Money supply has been excessive as a result of China’s macroeconomic policies and currency policy in recent years, and the increasing money supply affects inflation during a long period with variable lag,” Wu said.
Wu suggested that China’s economy depend less on short-term policy adjustment and concentrate more on transforming the pattern of economic development.
In the response to the global financial crisis, bank lending was excessive over the past two years, and regulatory decisions have increased the reserve requirement ratio and controlled money supply.
The People’s Bank of China (PBOC), the central bank, announced on Wednesday that it would raise bank’s benchmark one-year borrowing and lending rates by 25 basis points on Thursday, making clear that taming inflation remains a top priority even as the economic growth pace gently eases.
The move raises the benchmark one-year deposit rate to 3.50 percent and the one-year benchmark lending rate to 6.56 percent.
This is the third time for the central bank to raise interest rates this year. The previous one occurred on April 5. Meanwhile, the central bank has hiked the reserve requirement ratio for banks six times this year.
Guo Shuqing, chairman of China Construction Bank (CCB), the second largest bank in the world by market capitalization, said that he did not care about either a hard landing nor soft landing, he cared about landing.
“The government’s top priority is to curb inflation, and this is what Premier Wen Jiabao has said,” Guo said. “Banks lending less to keep the policy tight will result in small- and mid-sized private businesses increasingly finding themselves in a bind, which will be hard to avoid.”
Yu Yongding, an academician with Chinese Academy of Social Sciences (CASS), said that China’s economy will and has to slow down by accelerating the transform of structure, however, this is not a hard landing.
“To achieve 7 percent growth is not a problem, and inflation will slow down in the second half of the year as a result of macro adjustment policy,” Yu said.
China’s economy has to keep alert to combat shocks from outside, such as the debt crisis of European countries and the United States, Yu added.