Huo Deming: Don'T Condone Inflation RMB Needs At Least One Time Appreciation Of 10%.

After more than a year of rising prices, the recent positive news about inflation easing has been increasing.

On the one hand, international commodity prices have dropped sharply. Crude oil prices have fallen from less than $140 a barrel to less than US $120. On the one hand, domestic food prices have stabilized, thereby driving CPI down steadily after 8.7% in February, rising 7.1% in June, and expected to fall below 7% in July.

Therefore, many market participants are optimistic that the CPI growth in the second half of this year will gradually decline, and even to 5%-5.5% at the end of the year.

At the same time, under the "tight monetary policy" environment, many small and medium-sized enterprises and export enterprises are running into difficulties.

Despite the weak growth of the global economy, China's economy has achieved a strong growth of 10.4% in the first half of the year, but worries about the downward pressure on the economy have gained an increasingly powerful voice in the decision-making level and the market.

For example, at the meeting of the Political Bureau of the Central Committee of the CPC in July 25th, the key points of the policy of "Three Preventions" (anti inflation, overheating, and economic decline) have quietly changed into "maintaining the steady and rapid economic development and controlling the excessive price rise" as the primary task of macroeconomic regulation and control, and putting inflation in a prominent position.

This is quickly interpreted by a large number of people as saying: the importance of "anti inflation" is being partially pferred to "keep growth".

Subsequent developments seem to confirm this interpretation.

In July 30th, the Ministry of Finance and the State Administration of Taxation raised the export tax rebate rate of some textiles and clothing from 11% to 13%.

In early August, the Wall Street Journal quoted a person from a state-owned commercial bank as saying that the central bank has received notice from the central bank that the new credit limit for commercial banks will increase by 5% in 2008, and the new part will be mainly used to support small businesses and township enterprises.

In the interview with the people's daily, Liu He, deputy director of the central financial and economic leading group's office, clearly pointed out that "macro control policies have been basically in place, and there is no need to further increase regulation and control".

In this regard, some people in the market and academics hold different opinions. For example, Professor Xu Xiaonian of CEIBS strongly supports the continued implementation of the strict anti inflation policy.

From the data point of view, although inflation pressure has slowed down, compared with the goal of the government's 4.8% in the beginning of the year, the 7.9% increase in the first half of the year is undoubtedly still running at a high level.

Moreover, in June, China raised the price of refined oil and electricity, so PPI is expected to go further, and some agencies even predict that PPI may exceed 10% in July.

In addition, although the way of administrative pricing has played a role in restraining inflation to a certain extent, it has also created a problem of tight supply. For example, recently, media reports reported that coal shortage in Shandong, a coal producing province, led to coal shortage, resulting in the phenomenon of power restriction.

In a chaotic and complicated way, China's economy is facing not only the dual challenges of inflation and decline, but also the swing of understanding and policy.

To this end, this special interview with Professor Huo Deming, China Economic Research Center of Peking University.

Professor Huo, who came from Taiwan, was criticized by many investors for opposing the reduction of stamp duty to save the market. Now he is very firm in putting forward that it is a critical moment to combat inflation.

I believe that after reading, readers will have a clear view.

Inflation is always a monetary phenomenon.

Twenty-first Century: in the past few months, with the decline of the CPI index, people's concerns about inflation have eased.

As food prices become stable or even fall back, many market participants believe that the CPI growth in the second half of this year will continue to decline. This inflation, which is mainly driven by rising food prices, will begin to slow down.

However, some people think that the current situation is still very grim. Austerity policy can not be relaxed. What do you think of this?

Huo Deming: at present, many countries are facing the problem of inflation, and before 2007, international grain prices and energy prices began to rise gradually.

As a big trading country, China can not be unaffected by the external economic environment. So before we talk about the current inflation situation, we still have to think about the reasons for inflation in China in an open economic system.

How should we solve this problem?

There is a view that China can do nothing about the rise in international grain prices and energy prices. What do I do when people are caught in a fire?

Of course I want to save myself from fire, but sometimes I can't afford to lose the flames outside.

The second view is that China's inflation mainly comes from the rise in food prices, but the prices of non food commodities have not risen, so this is a relative price change that will disappear after some time.

On the surface, these two views are reasonable, but we know that inflation is a monetary phenomenon whenever and wherever, where is the relationship between them?

Of course, you can say that it doesn't matter. Under the action of market rules, the prices of related commodities will naturally drop down, that is to say, the two views above are not against the latter rule.

But I do not agree with this conclusion. Why?

I can explain it by an example.

China's CPI basket is made up of eight kinds of commodities. Since last year, the price of food has gone up a lot, and the price of non food has gone up very little. So many people say that inflation is only in the food field.

But in fact, this statement made a fundamental mistake. Measuring inflation CPI itself is an index that calculates the price of all the commodities covered by it and then averages it.

Here, the basic common sense of economics tells us that when other conditions remain unchanged (for example, the total amount of money is kept at a certain scale), when the prices of some commodities increase, the prices of other commodities will generally drop.

The reason is very simple. Since the total amount of money is certain, the price of different commodities will naturally change.

That is to say, more money is spent on pork and less money on other commodities, so that the prices of other commodities will drop.

From this point of view, we can see that the price of non food products in the CPI basket has not declined, but the increase is not as big as food.

In view of this, the money supply must have changed.

Twenty-first Century: do you mean that structural inflation and imported inflation in the market actually do not fully reflect the real situation?

Hodming: in macroeconomics, the present phenomenon can be described by the English word accommodate. The meaning of accommodate is connivance. Why do I say so?

Many people believe that the current inflation is caused by rising food prices, and this is the result of the rise in international grain prices and oil prices, so China has few ways to deal with it.

But it has been analyzed before that if the money supply is fixed, the price of non food products should go down.

Because China's monetary policy is greatly influenced by exchange rate policy, we should consider two aspects when we think about inflation.

In this atmosphere, I think people's discussion of inflation is still wrapped around a sense of "connivance" and increasingly strong.

Since the CPI rose 8.7% in February, we now say that the inflation peak seems to have been in the past few months, so we can breathe a sigh of relief.

But statistics can prove that the excessive supply of money has not fundamentally improved.

It may be said that central bank hedges have absorbed most of the excess liquidity, such as the 10 increase in reserve ratio in 2007, 4 in 2006, and 4 in 2008.

In addition, in recent years, the broad money supply (M2) growth rate is around 18%, and the growth rate of nominal GDP is not large. Therefore, the central bank has controlled the money supply.

But I would like to emphasize that if we look at the past M2 growth, it is not comprehensive. We must look at the future money supply.

Under the undervaluation of the exchange rate, the inflow of overseas capital will cause a large amount of foreign exchange. The central bank has repeatedly raised the deposit reserve ratio in the past, only blocking the existing foreign exchange funds to M2.

If the exchange rate is underestimated, then the large increase in foreign exchange will probably make it difficult for the central bank to control future M2 growth unless it continues to raise the deposit reserve ratio.

Twenty-first Century: Recently, with the appeal of export enterprises, the speed of RMB appreciation has slowed down. As you say, in the short term, China's inflation will not be substantially reduced, and it may also spread from food to non food.

Huo Deming: will inflation spread to the non food sector?

You see, M2, the central bank has used such a strong monetary policy tool as deposit reserve ratio to control its growth rate at 18%, but it can not keep inflation at around 3%.

Why do we set 3% as an inflation target?

Because the country that experienced inflation in the 70 and 80s years finally learned a lesson that we must not allow inflation to be too high.

The biggest problem with high inflation is that once inflation continues for a long time, for example, one or two years, the reality will affect people's expectations for the future.

Once inflation expectations are formed, people's behavior will change accordingly, and experience has proved that it is very difficult to bring back the changed behavior.

As a matter of fact, the use of the deposit reserve ratio is very small, and even before the frequent operation, we did not reduce inflation to below 3%.

Over 3% of inflation is quite dangerous in the west, and in the first half of the year it is about 8%. Now we expect that the figure in the second half of this year will fall naturally. I find it very difficult.