Introduction

For much of its existence, the People’s Republic of China was essentially free of open inflation. Rigid controls kept official prices of many goods virtually unchanged for decades before economic reforms began in 1978.

Limited inflationary pressures emerged after 2002 in the face of rising capital inflows and growing pressure for renminbi appreciation, as discussed in Chapter 1. However, Chinese authorities previously had to confront much more severe upward spikes in inflation in both 1988-1989 and 1993-1995. Inflation peaked at over 24% in 1994 before falling back to single digits in 1996 and less than zero in 1998. By 1998, the government’s concern clearly shifted to the slowing growth rate of the economy and the weaknesses in the nation’s banking system. The increased government expenditures aimed at boosting growth and recapitalizing the banks helped end China’s deflation episode but also set the stage for new inflation worries in the early twenty-first century.

This chapter includes some material previously published in Burdekin (2000) and the author is most grateful to Jim Dorn, editor of the Cato Journal, for permission to reprint. The author thanks Xiaojin Hu, Yanjie Feng Burdekin, Tom Willett, Pierre Siklos, Mack Ott, Charles Hu, Bill Brown, and Marc Weidenmier for their helpful comments on the original piece and extends gratitude to Ida Whited, Ling Cao, and Ran Tao for their research assistance.

Table 3.1. Early Renminbi Note Issue and Prices, 1948-1950

	Cumulative Note Issue (in billions of renminbi)	Wholesale Prices (index for 13 major cities)
December 31, 1948	19	100
January 31, 1949	-	153
April 30, 1949	-	287
July 31, 1949	280	1,059
September 30, 1949	810	-
October 31, 1949	1,100	-
November 30, 1949	2,000	5,376
December 31, 1949	2,670	-
February 28, 1950	4,100	-

Source: Burdekin and Wang (1999, p. 213).

This chapter offers an overview of the main inflationary and deflationary challenges faced by the People’s Republic since 1949. Parallels are drawn between some of the early methods of inflation control and more recent anti-inflationary policy in the 1990s and 2000s. Over the post-1978 period, the authorities have increasingly moved toward more market-based policies, with reduced reliance on administrative methods, aided by progress in such areas as price liberalization and the institutional separation of monetary and fiscal policy. Further financial and interest rate liberalization is still called for, however, and external factors have also posed especially strong challenges for Chinese policymakers in recent years. The deflationary pressures that emerged with the 1997-1998 Asian financial crisis were quickly replaced by new worries about increasing current account surpluses and reserve inflows. A brief overview of the latest People’s Bank policy measures aimed at combatting these expansionary pressures leads into the more detailed policy analysis that follows in Chapter 4.

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Source: Burdekin Richard C.K.. China’s Monetary Challenges: Past Experiences and Future Prospects. Cambridge University Press,2008. — 272 p.. 2008

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