Business Economics Report: Analyzing Inflation in the Chinese Economy

This report examines the economic challenges faced by China, focusing on the issue of inflation and its impact on the country's financial system, businesses, and consumers. The analysis highlights the role of monetary policy, including the constraints faced by the People's Bank of China in managing i...Read More

Running head: BUISNESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Author note

1BUISNESS ECONOMICS
Table of Contents
Introduction......................................................................................................................................2
The effects of inflation on economy of China.................................................................................2
Conclusion.......................................................................................................................................4
References........................................................................................................................................5

2BUISNESS ECONOMICS
Introduction
One of the fastest growing major economy of the world China ranked first in terms of
purchasing power parity (PPP) in 2019 (Gov.cn). The country is a market-oriented economy.
One of the major problem the economy is facing is higher inflation rate. In June 2019, the
inflation rate of the China was 2.7%. The inflation rate increased from 2018, which was 2.1%.
The effects of inflation on economy of China
The higher inflation rate is mainly caused by the problem of money supply. A large
amount of investment is required for its infrastructure project. The easy credit facilities available
in the county helps to pump money into the system (Scmp.com). It also helps to maintain
incessant investment in China. As a result, it leads to higher inflation rate in the country. Though,
the inflation figure of the country is not that high. It is getting difficult for the people to afford
higher cost of living in the country. Other than higher cost of living there are several adverse
impacts of inflation on economy of China. There are two source from where the total credit
financing of China comes. Half of the total credit financing is handled by the heavily regulated
banks of the country. On the other hand, other half of the total credit financing is handled by the
leasing companies and finance and trust companies (Bloomberg.com).
These financial institutions are not regulated. Moreover, these are known as shadow
banks. The influence of these shadow banks increased significantly in the economy of China.
Therefore, if left unregulated, these shadow banks may undermine the influence of the Chinese
government on the large financial system of the country. Recently, the growth of the country had
slow down dramatically. In such scenario, the role of biggest rescuer is played by the monetary
policy of the country. However, higher inflation rate of the country acted in against of the

3BUISNESS ECONOMICS
economic growth. The monetary authority of the country also unable to ease monetary policy in
order to aid the slowing economy. A major constraint of the central bank of the country, People’s
Bank of China is surging consumer inflation. As a result, the monetary easing in the upcoming
months also declined by the central bank of China. Despite the estimation that the economic
growth of China will fall below 6% in 2020 (Cbc.gov.tw).
The country witnessed higher food prices especially pork prices. In addition, pork crisis
in the country would continue to increase as there exists a production gap. The demand for pork
is continuously increasing. On the contrary, the production of pork is continuously contracting.
However, the central bank and government will try to add stimulus for the production units and
factories of china to produce more foods. The businesses such as production units and factories
in China are suffering from falling prices, profits and higher tariffs. Thus, it is difficult for the
central bank and government to revive those businesses amid higher inflation rate. Furthermore,
the economic problems of the country aggravated by the trade war with the United States (US).
Therefore, escalation of trade war along with higher inflation rate intensified the issues such as
fragile financial system and factory-price deflation. The debt level in the country is also very
high. Moreover, the property market of China also get inflated. All these problems created
pressure on the monetary authority of the country. Therefore, benchmark interest rate of the
country cannot be slashed amid economic turmoil. Therefore, slower growth rate of the country
will continue due to rising price pressure. The price spiral of economy of China aggravated
because of monetary stimulus and price shocks in the Chinese economy (He and Conglai). Here,
implementation of monetary policy is not possible as counter cyclical measure. Therefore, the
government and central bank of the country may take help of foreign exchange and fiscal policy
to solve economic crisis faced by the country.

4BUISNESS ECONOMICS
Conclusion
In recent years, the fastest growing economy of china faced various issues such as higher
inflation rate and economic slowdown (Jiang, Tsangyao and Xiao-Lin). The availability of
money supply aggravated the problem of inflation. As the inflation rate is high, the central bank
unable to take the route of monetary easing in order to scale up the economic growth of the
country. Thus, it intensified the problems for businesses and financial system of the country. In
addition, the prices and profits of businesses also fell because of higher tariffs and other
regulatory pressures. The combination of foreign exchange and fiscal policy may solve the
economic issues of China.

5BUISNESS ECONOMICS
References
Bloomberg.com. "Bloomberg - Are You A Robot?.". N. p., 2020.
https://www.bloomberg.com/news/articles/2019-10-29/china-s-monetary-policy-is-being-
hamstrung-by-inflation-surge
Cbc.gov.tw. "中中中中-中中中." . N. p., 2020. https://www.cbc.gov.tw/tw/mp-1.html
Gov.cn. "Gov.Cn: The Chinese Central Government's Official Web Portal.". N. p., 2020.
https://www.gov.cn/english/
He, Qizhi, and Conglai Fan. "Forecasting inflation in China." Emerging Markets Finance and
Trade 51.4 (2015): 689-700.
Jiang, Chun, Tsangyao Chang, and Xiao-Lin Li. "Money growth and inflation in China: New
evidence from a wavelet analysis." International Review of Economics & Finance 35
(2015): 249-261.
Scmp.com. "China’S Pork Price Rises 110 Per Cent Sending Consumer Inflation Soaring." South
China Morning Post. N. p., 2019.
https://www.scmp.com/economy/china-economy/article/3041352/chinas-consumer-
inflation-rockets-eight-year-high-pork-price