China steps in to stop inflation

[crabapple]

China steps in to curb inflation
China's cabinet says it will temporarily intervene in the market to curb rampant food and fuel price rises.

Retailers and producers will face heavy fines if they increase the price of basic necessities, the government says.

Food prices climbed more than 18% in November, while the price of pork jumped by more than 50%.

Inflation has traditionally been associated with civil unrest in China, and correspondents say the intervention shows the government is very concerned.

During the past 20 years, the Chinese administration has largely abandoned price controls, as the free market took hold across the country.

The price of basic essentials has increased hugely during this time, and families on low incomes - numbered in their hundreds of millions in China - currently spend between 30% and 50% of their income on food for the table.

According to the BBC correspondent in Shanghai, Quentin Sommerville, rising prices were the main concern among Chinese households last year, outranking worries over corruption and the growing wealth gap.

But economists are sceptical that the new rules will work, as price controls often lead to empty shelves.

And the UN's food aid agency is warning that another measure taken by China - restricting the exports of rice and other staples - could have serious effects in the region.

The World Food Programme says China's move, which followed similar restrictions imposed by India and Vietnam, could help to cause acute food shortages.

The WFP says North Korea, East Timor, Afghanistan, Bangladesh and Cambodia are particularly at risk.

Will this really hold in the long run? or is China heading for trouble?

 

[Julian Delphiki]

Unfortunately, price control does not work very well against inflation .

 

[Godwynn]

Are they taking a page from Robert Mugabe's book of Basic Economics?

 

[Abaddon]

Why is this happening to China.. i thought their economy was booming?

 

[Godwynn]

Why is this happening to China.. i thought their economy was booming?

You answered your own question.

 

[Abaddon]

With a booming economy.. doesnt your currency become more valuble?

I thought inflation was your money weakening...

 

[Godwynn]

With a booming economy.. doesnt your currency become more valuble?

I thought inflation was your money weakening...

Inflation is contributed by many factors. China is currently getting a lot of capital from foreign investors trying to get a piece of the pie.

Expansions are an inflationary period, China is seeing a large expansion so they are seeing high inflation.

 

[Norseone]

not to mention they lock their currency to ours so when ours goes down in value so does theirs...i think

 

[Shadylookin]

I'm no seasoned economist but couldn't their printing off more money so that they can keep a cheaper currency(so they can continue to export as much as they do) be the cause of this?

Either way price controls don't reduce inflation they just increase shortages, ala Robert Mugabee.

 

[Tabasco Sauce]

I'm not exactly good with economics and all, but I thought the Chinese undervalued their currency. Isn't inflation a good thing(not necessarily for the people) for the economy?

 

[Norseone]

I'm not exactly good with economics and all, but I thought the Chinese undervalued their currency. Isn't inflation a good thing(not necessarily for the people) for the economy?

Uh...for what purpose is having a good economy if it isnt helping your people?

 

[Stolen Rutters]

not to mention they lock their currency to ours so when ours goes down in value so does theirs...i think

They stopped that three years ago, I think. (Well, they allowed a limited float at least. It has been floating away from the old lock rate for years, now.)

 

[Norseone]

They stopped that three years ago, I think. (Well, they allowed a limited float at least. It has been floating away from the old lock rate for years, now.)

Then why are US politicians still yelling about it? I looked it up on wiki and apparently it can go 0.5% against the dollar...so its still pretty tied to it.

 

[Arwon]

Regarding the Chinese currency. It's pegged to the US dollar but they do move it.

Current policy is to warn in advance and change it gradually over several weeks, so as not to cause fear in the market like used to happen whenever they adjusted it.

 

[Stolen Rutters]

Then why are US politicians still yelling about it? I looked it up on wiki and apparently it can go 0.5% against the dollar...so its still pretty tied to it.

You're right about being tied. The policy just slowly shifts the target, and it's still tightly controlled. (It's 0.5% per day, not that they would allow that big a change every day, of course.)

However, I noticed reports stating that the dollar fell about 8% against a basket of currencies... and it fell 7% against the yuan in particular. (I can't find that link! Aargh.)

The yuan was literally locked to the US dollar from '94 to '05, but these numbers make it look like it's more closely locked to the basket.

 

[JerichoHill]

Price controls dont control inflation, they keep a lid on them.

Its like keeping a lid on a pot of boiling water, eventually, the pressure will cause it to burst.

For proof of this, check out what happened during and after Nixon's Wage and Price Controls. It led to stagflation, which was incredibly bad

 

[Arwon]

I agree that often happens, but isn't that only true when pressure continues to build? In cases of temporary spikes in pressure, price controls should theoretically do what they're intended to do.

 

[Tabasco Sauce]

Uh...for what purpose is having a good economy if it isnt helping your people?

That, my friend, is a question that economists have been asking each other for 200 years, lol.

 

[Shadylookin]

I agree that often happens, but isn't that only true when pressure continues to build? In cases of temporary spikes in pressure, price controls should theoretically do what they're intended to do.

why would you put a cap on a temporary spike that will just make people doubt the economy more?

Besides even if it's just for a short time if a retailer can't make money they won't sell the product. So whether a temporary cap or a long term one the end result is shortages.

 

[JerichoHill]

I agree that often happens, but isn't that only true when pressure continues to build? In cases of temporary spikes in pressure, price controls should theoretically do what they're intended to do.

How do you know when its just going to be temporary? Even the smartest economists can't time markets...

Price Controls create harm, period