Repressed Inflation in the Pre-Reform Period and After
After the movement toward a planned economy got substantially underway in 1952, measured inflation generally remained negligible until after the opening up process that began under Deng Xiaoping in 1978.
However, there appear to have been periods of substantial excess money growth and inflationary pressure during the pre-reform period. Although price controls ensured that these inflationary pressures were largely “repressed” and hidden from official inflation data, the extent of this repressed inflation is suggested, for example, in the rapid accumulation of money balances over the 1950-1957 period (Table 3.2). Real balances, that is, the renminbi money stock divided by the price level, rose by more than fivefold between 1950 and 1957 while the velocity of circulation declined by approximately 60%. Over this period, the money supply rose from RMB 2,632 million to RMB 15,675 million, far outstripping the increase in output from RMB 42,842 million to RMB 103,072 million (Jao, 1967-1968, p. 104). If velocity had remained at its original 1950 level of 16.2, prices should have risen 146.4% during 1950-1957, as compared to the measured cumulative wholesale price advance of 17.1% and retail price increase of 22.0% shown in Table 3.2. It is difficult to see why individuals should have voluntarily accumulated so much more money over this period, and the “great divergence between the increase in the quantity of money and the increase in price level indicates that monetary excess demand was being severely repressed” (Jao, 19671968, pp. 105-106). In practice, this repressed inflation “manifested itself predominantly in the form of chronic shortages, long queues, and extensive rationing... ” (Jao, 1991, p. 2).Feltenstein and Farhadian (1987) point to the latent inflationary pressures associated with rising real money balances in the 1950s being repeated in the late 1970s in a trend that continued into the early post-reform period.
Feltenstein and Farhadian estimate that, over the 1954-1983 period as a whole, the underlying rate of inflation implied by excess demand pressures was two and a half times the inflation rate suggested by official price data. Inflationary pressures were likely especially high in 1953, 1956, and 1961 (Hsiao, 1971; Peebles, 1991). Consistent with Feltenstein and Farhadian’s (1987, p. 148) finding of a strongly significant positive effect of the government’s budget deficit on the rate of broad money growth in China during 1954-1983, these three episodes of severe repressed inflation all coincided with signs of deterioration in the government’s fiscal position. Although the 1953 and 1956 episodes were, in part, a manifestation of the state’s investment and socialization policies, Hsiao (1971, pp. 236-251) points to a significant role played by fiscal factors in each case. Hsiao (1971, p. 236) suggests that the annual inflation rate in 1953 and 1956 would have been 10% to 15% in each case if estimated repressed inflation were added to open inflation.A still more serious upsurge in inflation occurred in 1961, when a 16.2% retail price increase may have been accompanied by as much as a 260% increase in free market prices (see Peebles, 1991, p. 24). Whereas basic necessities continued to be rationed, this surge in free market prices apparently reflected a deliberate strategy of selling high-price goods in order to withdraw money from the market (Peebles, 1991, pp. 28-29). Underlying inflationary pressures in 1961 reflected not only the collapse of industrial and agricultural output in the aftermath of the failed “Great Leap Forward” but also a large expansion in the size of the state’s budget during 1958-1960.[40] Moreover, as in the post-reform period, standard budget deficit figures were understated and failed to take into account the use of the People’s Bank as a provider of the state enterprises’ working capital needs. Loans from the People’s Bank provided 100% of quota working capital from 1959 through July 1961, which “relieved the budget of its share of the burden and thus ensured the appearance of a budgetary surplus by means of credit inflation during a period of high fiscal investment” (Hsiao, 1971, p.
78).Althoughtheinflationarypressures of the 1950s and early 1960s occurred while the Chinese economy remained more or less entirely “socialized,” repressed inflation certainly did not disappear overnight when economic reforms began in 1978. “Planned prices” set by the government remained in force for key commodities and for housing, forming part of a two-tier pricing system that combined market-based prices with administrative prices until the 1990s. Indeed, consumer fears about the inflationary consequences of the removal of the remaining price controls helped fuel the inflation spike in 1988-1989 that is discussed in more detail later in this chapter. Interest rates also remained tightly regulated and, despite considerable gradual liberalization since 1978, were still subject to limited administrative controls in the early twenty-first century.[41] Meanwhile, as discussed in Chapter 1, the exchange rate remained tightly controlled at first, and the renminbi did not become fully convertible even for current account purposes until 1996. Consequently, it is not surprising that Feltenstein and Ha (1991) find evidence of repressed inflation continuing into the 1979-1988 post-reform period.[42]