Before Inflation Returns To Low, Tight Policies Should Not Be Relaxed.

China's monetary policy seems to have come to a crossroads.

On the one hand, we estimate that CPI will rise by about 7.1% in June, down from 7.7% in May and 8.5% in April, but PPI may rise to a 8.8% rise in June, up from 8.2% in May.

With the rise of international oil prices, domestic oil prices and import prices of primary commodities such as iron ore, PPI will maintain a relatively high level in the second half of the year, and will probably eventually lead to CPI, leading to a rise in CPI again, which means that the anti inflationary pressure in the second half of this year has not slowed down.

On the other hand, due to the impact of the subprime mortgage crisis, the global economic growth has slowed down, and even the possibility of recession has occurred. China's exports have also been affected.

After deducting the price rising factor, the real investment has obviously declined, and the consumption has not started yet.

Coupled with the domestic stock market and the property market downturn, the snow disaster, earthquakes, floods and other sudden disasters, so pessimism began to diffuse, some scholars worry that China's economy will enter the recession.

The fear of slowing economic growth seems to be more than worrying about rising inflation.

Then, do we need to stick to tight monetary policy?

Is the current economic situation really very bad?

Most economists agree that natural disasters like snowstorms, earthquakes and floods have relatively limited impact on economic growth.

China's stock market and property market are in a state of callback after a dizzying mad rise.

In the past, overheated investment was the cause of China's overheating and bottlenecks in key sectors. Now, the blind investment boom has begun to decline.

In the past, as a world factory, China's trade surplus continued to expand, and its foreign exchange reserves increased. A large number of cheap and high-energy export products also led to the destruction of domestic environment and huge waste of resources.

Nowadays, some low value-added labor intensive export enterprises are forced to pform under the influence of the increase in loan costs, the appreciation of the renminbi and the export tax rebate rate adjustment. The sharp increase of the trade surplus has finally begun to slow down. This does not mean that the tight monetary policy has played a significant role in containing the total demand and adjusting the industrial structure.

The change of China's economy is developing towards the predetermined target of implementing tight monetary policy at that time.

Ye Gonghaolong, but when the dragon "sniffed down", he "abandoned and went away, lost his soul".

When the effect of the tight monetary policy appears, it begins to waver. Then, will the previous achievements be wasted?

Some scholars worry that economic growth will slow down, which is a fear of social instability.

Assuming that the economy is in a severe recession, there will certainly be widespread resentment.

However, most economists estimate that this year's GDP growth will remain at 9%-10% level, and some may even expect higher growth.

Even if the GDP growth rate dropped from 12% to 9%, will the recession come?

In fact, the current economic growth rate is still higher than the average in the past more than 10 years, and inflation is still at a high level.

This shows that China's economy is in a period of adjustment from overheating to a stable level. From the point of view of adjustment, this process needs to continue.

If inflation remains at a higher level, even if nominal GDP growth rate is still high, but the real GDP growth rate has slipped, what benefits can we get?

What is more serious is that before inflation returns to a low level, premature easing of tight monetary policy is bound to bring further inflation expectations. Monetary authorities have to take greater austerity measures under greater inflation pressure, which means greater economic growth rate losses.

However, from the current situation, inflation has more and more import characteristics.

The rise of international oil prices has been difficult to explain from a fundamental perspective, which is clearly the result of excess liquidity and low risk pricing.

Whether inflationary pressure comes from internal or external causes, continuing to adhere to tight monetary policy can cool the economy through demand side and reduce inflationary pressure.

We should not doubt the role of monetary policy in curbing inflation because of inflation, not all domestic factors.

Looking back at the history of several high oil prices, we can see that the impact of high oil prices (imported inflation) on the macro economy may be very large (the first two crises), and it may also be very small (late 90s and early twenty-first Century).

The impact of oil prices on the macroeconomic impact depends on three factors: first, the proportion of oil in the whole economy, the greater the proportion, the greater the impact.

The two is whether the labor market is flexible enough. That is to say, when the import cost is rising, enterprises can reduce the cost pressure by reducing the real wage level (the wage increase is lower than the price rise) and then protect the production. If not, it means that the enterprises will reduce production and collapse and the growth rate will drop.

The three is whether monetary policy has enough credibility. If monetary policy lacks credibility, high inflation expectations can not be overcome, and the pressure of inflation will be greater (or the loss of economic growth under established inflation level is even more serious).

The last point is very important. When comparing the two oil crisis and the experience of the late 1990s, economists found that it was precisely because of the inflation targeting system that the people did not set up high inflation expectations as they did in the previous two crises.

Compared with most oil importing countries, China is still in a favorable position to cope with the impact of high oil prices.

Because the total energy consumption of oil in China and the proportion of total import energy consumption in China's GDP are lower than that of most developed countries and neighboring Japan, Korea and other economies.

Moreover, China's labor market is more flexible, which provides room for enterprises to cope with the increase of impact costs.

Also, the monetary authorities began to curtail inflation earlier, and the intensity of tightening was strong. Residents did not have very high inflation expectations.

Taking all these factors into consideration, we believe that under the correct macroeconomic policy regulation, China's economy can cope with the impact of high oil prices and maintain the combination of economic growth and inflation at a desirable level.

However, if the wrong judgement situation is just a matter of keeping a looker on, inflation will become more and more powerful, which will eventually make the situation difficult to control.

Of course, monetary policy is tight and we should pay attention to "degree".

Going beyond the limit is as bad as falling short.

Too tight monetary policy will have a greater negative impact on the real economy.

Moreover, the problems facing China's economy are multiple. In addition to curbing inflation, adjusting the industrial structure, realizing the balance of international payments and achieving sustained and coordinated development are all policy objectives that the government should pay close attention to.

To achieve these goals, we should not only rely on monetary policy, but rather implement a suitable policy mix.

So what kind of policy mix should we stick to at the moment?

Adhering to tight monetary policy should be based on the broad money growth rate and remain stable at a reduced level.

It should be noted that in the era of inflation, it is not only nominal money growth but also the growth rate of real money balances.

The current real money balance growth rate has been lower than the average of the past more than 10 years (8%-10%, the average of 15% in the past more than 10 years), indicating that monetary policy has been in a tight state. Adhering to tight monetary policy needs to continue to maintain the current tightening efforts until inflation has improved markedly, and at the same time, we need to guard against excessive tightening of monetary policy.

In order to maintain the stability of broad money growth, we need to pay close attention to the source of money growth, especially the inflow of hot money.

In order to leave policy space for the monetary authorities, regulation of cross-border short-term speculative capital flows can not be relaxed.

Tight monetary policy includes the positive adjustment of the RMB exchange rate.

The appreciation of the renminbi over the past two years has played a significant role in optimizing the economic structure and reducing inflationary pressures (on the one hand, to curb total demand and on the other hand to reduce import inflation pressure). However, the gradual appreciation has triggered the rapid growth of hot money inflows and the operational pressure of monetary authorities.

It is very beneficial to maintain the appreciation of the RMB either in response to short-term inflation pressure or to cope with the import inflation pressure. The way to adjust the exchange rate is to reflect on it.

The exchange rate pricing power should be given way to the market as soon as possible, and the intervention of monetary authorities in the foreign exchange market will be reduced. This will fundamentally solve the hot money problem and solve the difficulties of monetary authority's policy operation, laying the foundation for the long-term stability of China's macroeconomic and financial markets.

In addition to curbing inflation through tight monetary policy, fiscal spending and tax revenue also need to be prepared to prevent excessive downscaling of possible economic growth rates and social problems that may arise.

Alternative policies include active preparation for major infrastructure projects, financial subsidies and assistance to low-income groups, tax adjustments (such as fuel tax increase and tax relief for business operation), and institutional reform of administrative monopoly industries, especially investment and financing system reform.