The Chinese Economy

In January 2011, Chinese growth accelerated to 9.8% as industrial production and retails sales picked up. As the second largest economy, this very high growth is hardly surprising, but it has caused concern for another key macroeconomic variable: inflation. Figures show that inflation climbed to 5.2% in March from a year before and the billionaire investor George Soros has said it is ‘somewhat out of control’. High property and food prices have contributed to high and rising inflation and this has led to the government implementing tightening measures within the economy.

In March, growth in property prices did finally begin to slow, according to the survey by the National Bureau of Statistics. Prices of new built homes had risen in 49 out of 70 Chinese cities in March from the previous months, but this was down from 56 cities in February. A property tax has also been implemented in cities like Shanghai and the minimum down payment required for second-home buyers has risen in a bid to prevent speculative buying. Bank reserve requirements have also been increased for the fourth time, after an increase in the interest rate at the beginning of April. The required reserve ratio for China’s biggest banks has now risen to 20.5%.

The situation in China is not the only country causing concern. Inflation in emerging markets is a growing concern, especially for the richer nations. The Singaporean finance minister, Tharman Shanmugaratnam, said:

“When inflation goes up in emerging markets, it’s not just an emerging market problem, it’s a global inflation and possibly interest rate problem … We have learned from painful experience in the past few years that nothing is isolated and that risk in one region rapidly gets transmitted to the rest of the world.”

He has said that inflation in emerging markets needs addressing to ensure that it does not begin to threaten the economic recovery of other leading economies. The following articles consider the latest Chinese developments.

New home price growth dips amid government tightening BBC News (18/4/11)
China growth may cool in boost for Wen’s inflation campaign Bloomberg Business (14/4/11)
China steps up inflation fight with bank reserves hike Independent, Nikhil Kumar (18/4/11)
China raises bank reserves again Reuters (17/4/11)
China’s economy ‘is just too hot’ says Peter Hoflich BBC News (18/4/10)
Top G20 economies face scrutiny over imbalances AFP, Paul Handley (16/4/11)
Inflation in China poses big threat to global trade Global Business, David Barboza (17/4/11)
Chinese inflation to slow to 4% by year-end: IMF AFP (17/4/11)
Chinese economic growth slows but inflation soars Guardian, Tania Branigan (15/4/11)


  1. What type of inflation is the Chinese economy experiencing? Explain your answer using a diagram.
  2. To what extent will the minimum payment on second homes and the property tax help reduce the growth in Chinese property prices?
  3. Why is there concern about high inflation in emerging markets and the impact it might have on other countries?
  4. How could the inflation in China hurt the economic recovery of countries such as the UK?
  5. How will the increase in the banks’ reserve requirements help inflation?
  6. Is high Chinese growth and high inflation the relationship you would expect to occur between these macroeconomic objectives? Explain your answer.