China’s Prices and Policies
Under Global Inflation

Daofu CHEN
19th Oct, Tokyo

Contents• Price Trends Since China's Reform and Opening-Up• China’s 4 Rounds of Inflation and its Management• Uniqueness of China’s Inflation Mechanism and Governance• Financialization has Impacted the Price Transmission Mechanism• The Uniqueness of China's Monetary Policy Transmission• Prices and Policies within China-U.S. Framework• China’s Prices and Policies in the Current Stage• Main Features of China's Economic Operations• Fundamental Factors in the Current Economic Trends• Debate on Three Economic Policy Approaches

11.1 China’s 4
rounds ofInflation2

Inflation and Its Management In 19843

Inflation and Its
Management in
1988

4Inflation and Its Management in 1993-1994

5

Inflation Pressure and Its Managementin 2004 and 20076

1.2 Uniqueness of China's Inflation
Mechanism and Governance Methods
China's inflation is always related to some form and degree of supply constraints, often
accompanied by economic and social structural adjustments and the development ofindustries.
Price Barrier Breaking and Release of Suppressed Price Pressure during Transition

Non-Market Goals and Soft Budget Constraints Exacerbating Inflation

Monetary Credit Always Supports Inflation to Some Extent

Inflation is Both a Result and a Means; Governance is Needed for the Self-reinforcing Loop ofInflation
7

1.3 Financialization & Price Transmission
Mechanism
The financialization ofcommodities has
significantly
influenced the
traditional priceadjustment
mechanism

With ample market
liquidity andexpectations ofincreased demand forcommodities during
economic recovery,
commodity prices
adjust rapidly in ashort period

Reduces theenthusiasm ofcommodity producers
to quickly resume
production

The price adjustmentmechanism along theindustrial chain shifts
from demand-driven
profit to cost-sharing,decreasing priceadjustment efficiency

8

Three parallel worlds of prices
Severe Fluctuation
Physical World(Transactions)

Financial World(Modes)

Factor Prices

Absorption
Profit Drop
Technology Advance
Manufacturer

Relatively Stable
Goods/Services
PricesAssets

Demand Side

M2

Pricing Up and Diversification, reflecting Relative Shortage
Digital World(Ecologies)

Industrial
Reorganization
9

1.4 The Uniqueness of China's Monetary Policy
Transmission• the period of strict scale control• the period when foreign exchange deposits dominated money supply• other periods, China's monetary policy transmission efficiency was not satisfactory• Many periods fell under policies that aimed for a loose monetary policy• Chinese financial institutions were more concerned about non-economic factors and financial stability• China's monetary policy transmission, to some extent, is not policy transmission but rather coordinationand cooperation among government departments.

10China’s Monetary Policy Transmission
Financial Performance
Requirement
MOF

Willing, Capacity, Demand

Conventional and NonConventional Policies
State CouncilPBOC

Banks(Capital,LegalObligation)

Regulatory Policies

Local
Government

Implicit Debt,
Accountability

SOEs

Capital.
Leverage Ratio

Real Estate

房住不炒
Fangzhubuchao

SMEs
Rural Development

CBIRC
NDRC

Market/Non-Market
Examination

Capital Market

Manufacturing
SectorIndustrial and Regional Policies
112 Prices
andPolicies
withinChina-U.S.
Framework• Analyzing China's inflation also requires an analysis within
the China-U.S. framework. When the economies of China
and the United States operate in a China-American manner,
the price trends in both countries are highly correlated.
12

CPI is different

132 Prices and Policies within
China-U.S. Framework

Further observation of the relationshipbetween the year-on-year growth rates
of consumer spending in the UnitedStates and the year-on-year growth rates
of imports from China reveals a strong
correlation between the two. However,this correlation weakened after 2021.

14

3 China’s Prices and Policies Now
3.1 Main Features of China’s Economic Operations• Differentiated Recovery in August, Yet Fragile Foundation• High M2 and Social Financing Growth, Low Inflation and GDP Growth, Widespread MicroEntity Debt Swaps• Macroeconomic Liquidity is Reasonably Abundant, but Micro-Entity Liquidity is Scarce• Market Confidence is Still Insufficient and Fragile15

3.2 Fundamental Factors in the Current
Economic Trends

Pains and Differentiation
Under StructuralTransformation

Rapid Decline in Real
Estate and Exports

Micro Entities Adopting
Risk-Averse and LowDesire Behavior
Patterns

16

3.3 Debate on Three Economic Policy Approaches

Intensifying
Short-term
DemandStimulus

Structural
Reforms to Breakthe Stalemate

SeekingSolutions
Outside theEconomic Field

17

Q&A18