1993, there were three expansions and four contractions in terms of GNP growth (see Figures 2)36. Second, the magnitude of price and output fluctuation is large, compared to developed countries and China's past experience in general. In 1988, the retail price index went up by 18.7 percent, while the lowest price increase was 2 percent in 1983. Variations in output is also significant. The peak of GNP growth rate during the period of 1979-1993 reached 14.5 percent in 1988 while the trough was about 4 percent in 1989.

The output and price movements are largely created by fluctuation in money supply, rather than exogenously supply or demand shocks. The positive link between money supply and output growth is particularly clear, as pointed out by a number of articles (Walker, 1990; Feltenstein and Ha 1991, and Chen et al, 1992, etc). The price change is also positively correlated to money supply, but to a lesser extent. This is because some of the short term price increase, such as that at end-1988, were partly created by the consumers' expectation of price increase due to the government announcement of immediate price reform. Once the expectation of price increase is high, consumers rush to purchase consumer goods, and the velocity of money increases sharply. Nevertheless, some econometric analyses show that the long run relationship between price movement and growth of money supply in China is still rather clear (Chow, 1987).

The central bank's money supply decision seems not have stabilized the economy, rather, in most cases, were causes of the economic cycles. During all periods of economic overheating, the credit and cash issuance plan were not strictly adhered to, and were repeatedly revised upwards by substntial margins. When inflation rises to a level where political instability becomes obvious signals, the centra authority tums to sharply reduce the credit and cash issuance. The economy then enters a period of recession. This type of stop-and-go cycles has been a stylized feature of the Chinese monetary controls over the past decade and a half, and has been well documented in the literature.<sup>3</sup> ' Many economists have analyzed the cause for China's economic cycles. Several explanations prevail. (1) Excessive investment. This is a opinion often heard from government officials and economists: excessive investment leads to excessive demand and cseates inflation. However, it is easy to see from standard macro theory that excessive investment is only an indicator of economic overheating, rather than the cause. The question is, what caused the high growth of investment? As long as the central bank can effectively control money supply, where comes the excessive investment? (2) Excessive consumption. Many argue t.aat entrprises, particularly state-owned enterprises, tend to pay their workers excessive wags and ir. kind benefits. According to them, these enteprises use various tricks **to** circumven **t** he government imposed restrictions on wage and bonus growth; in many of the overheated periods, wage M An expansion (contraction) is roughly defined as a continued increase (decrease) in GNP growth (over the same period of last year) for four consecutive quarters.

3 See The World Bank (1990) for a detaile **d** escription of China's money supply fluctuation during 1980-1989.

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