While Western economies are still struggling to recover from the 2008 global economic collapse China bounced back after a single quarter and, thanks to a massive stimulus plan, has maintained breakneck economic growth. “All the measures we took,” one Chinese report read, “have proven to be entirely correct.”

China’s GDP surged 11.9 percent in first quarter of 2010. It was the second quarter in a row of double digit growth and a clear indication that China had quickly overcome the economic slump and was back to explosive growth as usual. The trend was attributed to positive effects from government stimulus measures, strong consumer spending (a 17.9 percent increase from the previous year) and an increase of exports (a 28.7 percent increase). On the negative side there were indicators that some sectors of the economy, particularly real estate, were overheated and inflation was a concern.

China reported a trade deficit in March 2010, its first since April 2004. The deficit of $7.24 billion was attributed to energy and raw material imports and a slow down of domestic production following the Chinese New Year. Some questioned the veracity of the data as the its announcement came just as the United States was racheting up pressure on China to devalue the yuan.

Growth was 10.3 percent in 2010. GDP was $5.88 trillion, ahead of Japan’s $5.45 billion. China trade surplus in 2010 was $183.1 billion, down from $196.1 billion in 2009 and that was a big drop from a peak of nearly $300 billion — before the Lehman shock — in 2008. The trade gap between China and the United States was $181.3 billion in 2010, up 26 percent from 2009.

China created 12 million new jobs in 2011, three million more than the government’s target for 2011, according to the labor ministry. The urban registered jobless rate was 4.1 percent at the end of 2011, compared with the government target of keeping unemployment under 4.6 percent. [Source: Bloomberg News, February 28, 2012]

Many economist feel that China has to keep growth below 10 percent to prevent overheating and inflation.

China's Growth Engine Slows in 2011

For all of 2011, China grew 9.2 percent, compared with 10.4 percent in 2010. For the fourth quarter, the 8.9 percent GDP growth, compared with a year earlier, was the lowest reading since the second quarter of 2009 during the global recession. Growth was 9.1 percent in the July-September quarter, down from 9.5 percent in the April-June quarter. China account for about one third of global growth in 2011 but market too small to offset poor US and European demand to boost the global economy. [Source: AP, Wall Street Journal]

In January 2012, the Wall Street Journal reported: “China posted GDP growth of 8.9 percent in the last quarter of 2011, compared with a year earlier, a number that came in higher than had been expected but one that nevertheless showed that the world's fastest engine of growth is downshifting. China's fourth-quarter performance would be the envy of most any other nation, and markets reacted positively to the data, with the Shanghai Composite Index rising 4.2 percent, its biggest rise in two years. Indexes around the world — eager for any sign that China can steer its economy toward to a soft landing and help offset weakness elsewhere — also took heart from the data. [Source:Wall Street Journal, Tom Orlik and Bob Davis, January 17, 2012]

The government is aiming to lift domestic demand's role in driving China's growth, and robust growth in domestic consumption contributed to the higher-than-expected fourth-quarter number: For the full year, real retail sales growth of 11.7 percent outpaced growth of GDP. Wages are rising, and the government hopes that will encourage domestic households to spend still more.

However, analysts believe that transition may not be fast or extensive enough to save China from lower growth in the months ahead. When measured on a quarter-on-quarter basis, China's growth fell more sharply to 8.2 percent, reflecting slower growth in exports and weaknesses in the country's property market.

The global economy increasingly depends on China for growth. An expanding Chinese economy creates demand for commodities from many developing countries and for industrial products and services from wealthy ones. China, the world's second-largest economy, has also become one of the world's leading destinations for foreign investment.

After-Effects of the Stimulus Package in China

China employed the stimulus strategy after the Asian financial crisis in 1997-98, the bust in 2001 and the global economic crisis in 2008-2009. The strategy catapulted China past Japan to become the world's second-largest economy; its growth helped keep the global slump from deepening. However, the loose monetary policy, and big investments in local government projects, associated with the stimulus package did revive economic growth. But even at the time there were already concerns about soaring property prices, undisciplined bank lending and the huge debts being amassed by local governments.

On the after-effects of the stimulus package, David Pierson wrote in the Los Angeles Times, “The nation's debt levels have reached new heights. A national audit released in June 2011 found outstanding loans to local governments, among the biggest players in the building binge, amounted to $1.65 trillion, or nearly a third of China's GDP. [Source: David Pierson, Los Angeles Times, August 16, 2011]

The New York Times reported: “Another growth driver — local government investment in infrastructure projects — has also come under scrutiny from regulators because of worries that overly aggressive spending on new roads, bridges, tunnels, subways and showpiece projects could lead to a wave of nonperforming loans to municipalities.”

“There are also serious questions about how much new investment China needs,” Pierson wrote. “Although the construction blitz created millions of short-term jobs, there is slack demand for some of the resulting projects. Apartment towers in some cities are largely empty, as are malls and skyscrapers in others. China's steel industry is saddled with so much extra capacity that it has been accused of dumping product overseas.”"If all this investment remains unprofitable for the long term, there will be serious risk to the banking system," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, a government think tank. "The problem is it's become a tool for local government officials to compete and a hotbed for corruption."

The 2008 economic stimulus plan, which pumped 4 trillion renminbi, or $625 billion, into the economy, has been singled out as a key source of rising corruption. At least 700 billion renminbi went to the high-speed rail system in 2010 alone, with "no independent oversight or regulation," Transparency International said. The rail project may be "the biggest single financial scandal not just in China, but perhaps in the world," a Transparency International representative told the New York Times. See Railways and High-Speed railways Under Education and Transportation.

Construction Bubble Caused by the Stimulus Package

Beijing's massive program to shield its economy from fallout from the financial crisis has fueled a construction boom. Many construction projects, including malls and office towers, sit nearly empty. In the first quarter of 2011, fixed asset investment — a broad measure of building activity — jumped 25 percent from the period a year earlier, and real estate investment soared 37 percent, according to government data.

David Pierson wrote in the Los Angeles Times, “China splurged on Australian iron ore, Chilean copper and Saudi Arabian oil to fuel its construction boom. While the U.S. economy was mired in recession, with negative year-over-year growth in gross domestic product in 2008 and 2009, China's economy expanded by more than 9 percent annually over the same period. [Source: David Pierson, Los Angeles Times, August 16, 2011]

Reporting from Beijing, Pierson wrote, “Housed in a five-story glass cube with a multiplex cinema and western brands like Gap and Sephora, the Care City Shopping Mall in southwest Beijing has all the ingredients for a great retail experience — except actual shoppers. The visitors milling around on a recent muggy afternoon appeared most interested in the free air-conditioning and the food court. Salesclerks had little to do but nap, yawn or fiddle with their cellphones.

Weaknesses in the Chinese Economy

Tom Orlik and Bob Davis wrote in the Wall Street Journal: Even if Beijing wanted to step on the gas, the potential growth rate of the Chinese economy isn't what it was. A labor force that has already plateaued and will soon start to shrink in size, and diminishing returns to further investment mean the double-digit growth of the precrisis years are likely a relic of the past. [Source: Wall Street Journal, Tom Orlik and Bob Davis, January 17, 2012]

China has begun to ease monetary policy to try to avoid a calamitous drop in growth. In November 2011, the central bank moved earlier than expected to reduce the bank reserve requirements by 0.5 percentage point, paving the way for a bounce in new loans in the final months of the year. But the government's policy response is constrained by the consequences of the last surge of stimulus lending, which ended up heavily burdening local governments that borrowed for infrastructure projects. In 2011, a report by the government's own auditor acknowledged 10.7 trillion yuan ($1.7 trillion) in debts taken on by local governments.

The Chinese economy is buffeted by two very different forces. Slow growth globally has hurt Chinese exports, including to the European Union, China's largest trading partner. Chinese exports there grew just 7 percent year-to-year in December, down from a midyear high of 22 percent in August.

Market analysts pointed to strong retail sales as cushioning the decline in GDP growth. In December, the value of retail rose 18.1 percent compared with the year earlier, somewhat faster than sales growth in November. J.P. Morgan attributed the gain to "some front-loading of consumer spending" ahead of the Chinese New Year holiday, which starts Jan. 23.

More fundamentally, domestic spending represented about 52 percent of GDP growth in the first quarter, according to Barclays Capital, a higher percentage than in the full-year GDP results for 2009 through 2011. China has long been criticized for relying too much on investment and exports for growth and not enough on domestic spending. Chinese officials have said they are working on new incentives to spur domestic spending because ones subsidizing purchases of cars and appliances have expired.

China's other major weakness is its property market, but there Chinese government policy plays a major role. Beijing has been trying to rein in prices by making it more difficult for developers to finance luxury apartments and making it harder for investors to buy them by requiring down payments of as much as 60 percent, among other measures. Almost two years of such controls on the property sector has put a serious dent in sales, and developers are starting to go slow on new projects. New floor area under construction contracted in December compared with a year earlier, a stark contrast with growth of 32 percent in August.

China is counting on its massive effort to build low-income housing, called "social housing," to provide enough demand to keep the real-estate market from collapsing. China's real-estate sector could account for roughly 25 percent of its GDP, when counting raw materials, construction and the furniture, appliances and other goods used to outfit apartments. But it is unclear whether China could accelerate the program, whose goal is to build 36 million subsidized apartments by the end of 2015 — enough units to house the entire population of Germany. The Ministry of Housing has reduced the 2012 target for social-housing starts to roughly seven million in 2012 from a goal of 10 million in 2011. Some reduction was expected, but the large decline reflects concern that local governments couldn't meet the construction targets and were inflating their claims of progress.

China Feels Drag from European Debt Crisis

Keith B. Richburg wrote in the Washington Post, “Exports are down. Some small factories have closed. Growth projections for next year have been lowered. Foreign exchange reserves have lost their value. And in a further sign of just how badly the continuing debt crisis in the euro-zone economies is affecting China, a few economists here are even speculating that China could soon see its first trade deficit in two decades. “The shrinking European market will definitely have an impact on China’s exports, and we should be prepared for it,” said Teng Tai, the chief economist of China Minsheng Banking. He said the falloff in demand from Europe “will be painful.” Any slowdown in China could also be felt more widely, because of its role in recent years as a principal engine of global economic growth. [Source: Keith B. Richburg, Washington Post , November 24, 2011]

China sends one-fifth of its exports to the European Union, and Bert Hofman, the World Bank’s chief economist for the region, said the slowdown was hitting every sector “from toys to flatscreens,” with a particular effect on the electronics industry. In Dongguan, in export-heavy Guangdong province in southern China, some 450 small and medium-size companies have closed in the past 10 months, mostly firms making clothing and toys, as export orders have shrunk.

China continues to run a trade surplus, expected to be about $150 billion in 2011. But that surplus has declined for three years running, and the slide of exports to Europe, combined with continuing weak demand from the United States, has at least some economists here warning about a sharper slide that might even lead to a trade deficit, something recently considered unthinkable.

The euro-zone crisis has also brought a decline in the amount of foreign capital flowing into China. According to the Agricultural Bank of China, which cited government statistics, investment in China from the 27 E.U. countries rose 1.05 percent in the period from January to October this year, a huge drop from the 10.71 percent increase in 2010. Also, the bank said, because of the depreciation of the euro against the dollar, China’s foreign exchange reserves lost $87.9 billion in value. The huge and real-time euro hit to China’s economy also partly explains the reluctance of Beijing’s leaders to engage with critics, including the Obama administration, urging a faster appreciation of the Chinese currency, the renminbi, also known as the yuan. The yuan has already appreciated about 10 percent against the U.S. dollar since Beijing’s currency managers resumed a gradual, managed float in June 2010.

Lack of Options to Counter the European Debt Crisis

Keith B. Richburg wrote in the Washington Post, “Businesspeople and others said the situation appears even worse than the contraction that followed the global economic recession of 2008, because then the central government in Beijing immediately stepped in with a two-year, $586 billion fiscal stimulus package that began March 2009. “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” said Chinese Vice Premier Wang Qishan, quoted by the state-run Xinhua News Agency. “As for our country, which relies highly on external demands, we must see the situation clearly and get our own business done.” [Source: Keith B. Richburg, Washington Post , November 24, 2011]

Beijing’s leadership has said there will be no stimulus this time. The stimulus in 2009 and 2010 is credited with insulating China’s economy from the worst effects of the Great Recession, but it also caused problems such as excess liquidity and a huge debt burden on local governments and state enterprises. Chinese leaders are now more concerned about reining in rising inflation and are trying to engineer a “soft landing” for the economy.

Some businessmen and economists said the latest global slowdown would accelerate China’s switch from an economy dependent on exports to one fueled by domestic consumption. Ma Jun, the sales manager of a toy factory in Dongguan, said his factory has already made the transformation to greater dependence on the domestic market. The factory used to export most of its stuffed toys to Europe, but there were constant fluctuations in the exchange rate, and the 2008 recession brought a sharp drop-off in demand. Now, 60 to 70 percent of the toys it sells are for the domestic Chinese market, with 30 to 40 percent going to Europe. But the shift came only after the factory downsized its workforce from 600 to 100, expanded its design team, registered its trademarks in China and worked to build a domestic market. Also, profits are about a tenth of what they were before. “It’s hard to develop a domestic market, since the demand is weak. But on their other hand, there’s less risk,” Ma Jun said. “It’s the price we have to pay, because this is the only way for us to survive.”

That’s the path the central government in Beijing would like other Chinese exporters to follow. But the transformation will take time. “That is a long-term trajectory,” said Hofman, the World Bank economist. “China wants to become less dependent on exports. China wants to become less dependent on investment.” But, he added, “that requires a dramatic shift.”

China Reports Rare Trade Deficit

In March 2012, VOA News reported: Chinese officials on Saturday reported a huge trade deficit in February, as imports swamped exports, to leave the largest deficit in at least a decade. Customs data showed that exports in February earned $114.5 billion, while imports stood at $145.9 billion. The $31.4 billion deficit was the largest since the mid-1990s, and a rare exception to a recent string of multibillion-dollar surpluses. Analysts say efforts to sell to China's major trading partners in the West are suffering from the effects of the eurozone debt crisis and weak economic recovery in the United States. [Source: VOA News, March 10, 2012]

In November 2011, the New York Times reported: China imports rose sharply in October while export growth continued to slow, according to data that suggest robust domestic demand could offset the effects of weakening demand for Chinese goods in Europe and elsewhere. The stronger-than-expected import data may also reflect inventory buildups as Chinese importers took advantage of price swings to stock up on crude oil, copper and other commodities, analysts said. Over all, imports rose a surprising 28.7 percent, compared with levels a year ago, far surpassing an increase in September of 20.9 percent. Export growth continued to moderate, rising 15.9 percent over levels of a year ago. Economists said the data — the weakest in eight months — reflected continued economic turmoil in Europe. Shipments to Europe grew 7.5 percent compared with the level of a year earlier, down from an increase of 9.8 percent in September, Barclays Capital said in a note. [Source: Sharon Lafraniere, New York Times, November 10, 2011]

While the import data were surprisingly strong, Yang Lingxiu, a Barclays Capital economist, said the export data were not alarming. “The external weakness will influence growth in China but it is not a great slowdown,” he said. “It is a moderation in momentum.” Goldman Sachs said in a note that while exports were significantly down from the first half of the year, the data indicate “external demand has not deteriorated further” since July.

Chinese officials presented a more dire view. “What we’re facing now is a grave situation for exports and slowdown is inevitable in the third and fourth quarters,” Zhang Yansheng, director of the Institute for International Economics Research of the National Development and Reform Commission, said, according to a report by Xinhua, the state-run news agency.

Mr. Zhang, China’s top economic planner, attributed the moderation in economic growth to shrinking external demand, rising costs, liquidity problems and the gradual appreciation of the renminbi. He said that China also faced the risk of trade-protection measures in Europe and the United States, which says that China keeps its currency weak against the dollar to lower the price of its exports.

According to Barclays Capital, while Chinese exports this year are expected to grow 20 percent, its trade surplus is likely to narrow to about 2.4 percent of gross domestic product, down from 3.1 percent in 2010. Chinese officials cite the slimmer surplus as evidence that the Chinese economy is more balanced and increasingly dependent on domestic demand from industrial and consumer sectors. UBS Securities said, “For now, the weakening exports, strong imports and narrowing trade surplus should help China resist calls for a faster appreciation of the renminbi.

Inflation in China

China has traditionally been very cheap. In the 1980s, one could pay 16 cents to be admitted into a public bath which provided a piece of soap, a towel and a bed. After the Deng economic reforms began taking hold in the 1980s it began increasing. Consumer inflation rose 17.5 percent in 1989; 3 percent 1991; 5 percent 1992; 13 percent 1993; 27 percent in 1994. The price of many basic foods and grains increased 60 percent in the early 1990s.

Inflation was running at 5 percent and 6 percent in the 2000s with prices for things like textiles, cell phones and cars falling while those for gasoline and food rose. The government has used price controls to keep inflation in check. In 2005 as some inflation pressures were easing there was discussion of lifting price controls.

In recent years high inflation has been painful to average Chinese. Soaring prices for pork, vegetables and other staples have authorities worried about the potential for social unrest. Food prices account for a third of the consumer price index used to measure inflation. So has a property bubble that has put home ownership out of reach of millions, exacerbating the gulf between rich and poor. The poor suffer the most. Poor families spend up to half their incomes on food and are hard hit by high price rises. Businesses, meanwhile, have to cope with rising labor costs, energy shortages and higher borrowing costs.

The Chinese government is fearful of high inflation. Through China’s history major social upheavals and unrest have occurred when prices were high and people took to the streets to protest. High prices was one of the main forces behind the Tiananmen square protests in 1989.

High inflation endangers China’s status as the low-cost workshop for the world. It also limits China's ability to offset slowdowns by launching new stimulus packages. If the government’s efforts to fight inflation cause the economy to stumble, that will cloud the outlook for international businesses — whether multinationals like General Electric or copper miners in Chile — that have been counting on China for growth. “Actual numbers are worse than officially reported,” Carmen M. Reinhart, an economist at the Peterson Institute for International Economics in Washington, told the New York Times. Chinese and Western economists say that the index understates the true extent of inflation because of methodology problems. The National Bureau of Statistics has said that it is trying to improve the index.

High Inflation in China in 2010 and 2011

Inflation rose 5.1 percent in November 2010, the first time it exceed 5 percent in two years. This was on the heels of a 4.4 percent rise in October and followed by a 4.6 percent rise in December . The government anticipated price increases and took measures boost supplies of goods whose supplies were reduced by summer floods and winter cold snaps but the measures took some time to kick in and prices were higher than had been hoped. Food prices account for a third of the consumer price index used to measure inflation.

Consumer price inflation was 5.4 percent in the first three months of 2011. Many experts believe the true figure is higher. In January food prices rose 10.3 percent, with a 34.8 percent rise increase in fresh fruit prices and a 20.2 percent rise in the price of eggs. Inflation remained relatively high despite a series of government measures including three recent interest-rate increases. "Inflation is like a tiger; once it gets free, it is difficult to put back in the cage," Premier Wen said.

Consumer price inflation eased slightly to 5.3 percent in April on the back of a 11.5 percent in food cost and was well above the government target of 4 percent. Inflation reached a 34-month high of 5.5 percent in May 2011 driven by 11.7 percent food costs, which had increased due to demand exceeding supply and the affects of drought, floods and other weather-related problems on crops. McDonald’s raised the prices of its hamburgers and drinks by 10 percent.

Inflation was up 6.4 percent, , with food prices up 14.4 percent, in June 2011, rising further to 6.5 percent (a 37 month high) , with food prices up 14.8 percent , in July, then dropped to 6.2 percent, with food prices up 14.8 percent, in August. Crop damaged attributed to heavy rains and summer floods contributed to the high prices.

Analysts have said that current price hikes are much more serious than those seen in previous years, with the cost of everything from land to labor to raw materials all climbing. “Inflation pressures are far more stubborn this time because structural inflation is a much bigger problem than it was at any time in the last decade,” Ben Simpfendorfer, managing director of economic consultancy firm China Insider, told AFP.

Citizens like Wang Jianren, 56, a retiree in Shanghai, told the New York Times, “Prices have gone up a lot,” Mr. Wang said at an indoor vegetable market on Friday. “Unstable prices make people nervous and make society unstable. In this sense, our generation even has some nostalgia for Mao’s era.”

See High Food Prices, Food

Causes of High Inflation in China in 2010 and 2011

Inflation was spurred by high food prices, which in turned was pushed up by poor harvest of some crops caused by bad weather and drought. Prices of pork, vegetables and fruit have been driven up by summer flooding that wrecked crops in China's south and east.

See Drought

Analysts have blame the inflation spike on rising demand that is outstripping food supplies and a flood of bank lending that was part of China's stimulus after the 2008 global crisis. Following Beijing's measures to cool the economy and contain price rises, growth in the world's second-largest economy has already shown signs of a moderation with expansion in manufacturing activities slowing in recent months.

The money supply, which acts as fuel for inflation expanded by 24 percent in 2008, 2009 and 2010. High fuel prices and repeated rate hikes and investment curbs , which prompted a shortage of credit, also contributed to the high inflation.

The Chinese government put much of the blame for the problem on international factors, in particular "some countries" that have implemented quantitative-easing policies — a remark aimed largely at the U.S.”"creating large-scale fluctuations" in global exchange rates and prices of goods. Another factor he cited was the recent unrest in the Arab world, which he said had helped to push oil over $100 a barrel.

David Barboza wrote in the New York Times, “Some of the inflationary factors, like global commodity and food prices, may be beyond Beijing’s ability to influence. Gasoline prices have also jumped sharply, in line with global oil prices. As the world’s largest car market, China’s demand for fuel is soaring, and gasoline prices are close to $4.50 a gallon, up from $3.82 a gallon in late 2009.”

Fighting Inflation in China

The Chinese government has pledged a war on inflation. The central bank has responded to growing price pressures by raising interest rates and repeatedly increasing the amount of money banks must keep in reserve. Raising interest rates on loans discourages borrowing and raising them on deposits encourages savings. Ordering banks to set aside more cash reserves reduces the amount of money available for loans — an effort to cool down the economy. Authorities have also intervened directly in the market, warning a number of companies not to raise prices as they crack down on hoarding and pledge subsidies to the poor. [Source: Fran Wang, AFP, June 6, 2011]

The Chinese government subsidized food and called on local authorities to increase supply and crack down on hoarders and speculators and raise the minimum wage. In November 2010, the Chinese government announced food subsidies for poor families and promised to ease shortages of vegetables and grain and diesel that had contributed to an increases in food prices and inflation. Stockpiles of grain, cooking oil and sugar were released; more money was given to school lunch programs. Beijing has also taken a hard line against any private company suspected of stoking inflation. Unilever was fined $310,000 for mentioning to reporters that it might raise prices — the news sparked panic buying of shampoo.

The People’s Bank of China raised Benchmark raised interest rates four times between October 2010 and April 2011 and has required banks to lock up a record 20 percent of their deposits to curb excess liquidity and overheating. When interest rates are low and lots of cash is around (excess liquidity) people have a tendency to buy property, stocks and other assets, a situation that encourages speculation and bubbles and drives up prices further. High interest rates and tightened liquidity are ways of preventing bubbles and inflation that encourage people to put their money in the bank to take advantage of high rates

Analysts have said the results of this economic management have been mixed. Growth has begun to moderate from its torrid pace of about 10 percent annual growth but inflation has become worse.

Fighting Inflation and the Yuan

Some modest increases in the value of the yuan against the dollar led some to speculate that China is moving more aggressively to fight inflation and ease trade tensions with the West.

Raising the value of the yuan is one measure that economists and people outside China say could help in the fight against inflation. Economists say increasing the value of the yuan would address inflation by making imports cheaper and reduce the nation's money supply. The U.S. argues that a stronger yuan is in China's own best interests as it would help combat inflation by reducing import costs in local currency terms.

When asked if government efforts to combat inflation would include a more rapid appreciation of the yuan, Premier Wen Jiabao stressed gradualism. "We will further increase the flexibility of the [yuan] in accordance with market demand," he said. "But at the same time we must keep in mind that this kind of appreciation is gradual, because it relates to employment and to what companies can bear. We must maintain social stability."

Obstacles to Fighting Inflation in China

Despite government measures inflation continued to rise. The government had set the target of 4 percent inflation in 2011 but the real figures were between 5 and 6 percent. In June 2011, Chinese premier Wen Jiabao admitted on Hong Kong television that the Chinese government’s goal of limiting inflation to 4 percent was unattainable and a “CPI under 5 percent” was more realistic.

Jianguang Shen, chef economist at Muzuho Securities in Hong Kong, told Reuters, “We believe that a new paradigm of higher inflation will be a fixture in the medium term...China’s output gap or excess capacity is shrinking due to steadily increasing demand and the phasing out of obsolete capacity.” In addition to that China is depleting its pool of surplus workers, resulting in a higher wages and higher prices. Speculative bubbles in property and other assets continue to exist despite efforts to reign them in.

Economist also say that rising inflation in emerging countries is not unusual and modest rises of four or five percent usually cause no problems. They also say high prices for energy and water can be good things, encouraging conservation and discouraging waste.

Slowing Growth, a Result of the Inflation Fight in China

By the summer of 2011 manufacturing was slowing down. Factory growth was at a 28-month low in July. Some economists saw this as the result of Beijing walking the fine line between promoting growth and trying to reign in inflation.

In June 2011, AP reported, China's manufacturers suffered sluggish growth in orders as inflation-fighting curbs on credit took a toll on demand, according to a government survey. The China Federation of Logistics and Purchasing said its monthly purchasing managers index fell to 50.9 in June from 52 in May, 52.9 in April and 53.4 in March. The index has remained above 50, the benchmark for expansion, for 26 straight months. The report said the trend likely augurs a further slowdown in growth brought on by inflation-fighting curbs on credit. [Source: Associated Press, June 30, 2011]

Declines were greatest in the production, new orders, purchasing volume and prices for raw materials indices, it said. The survey also showed a contraction in production of chemicals, textiles, and transportation equipment. Imports and new export orders also slowed. The survey "indicates that future economic growth may continue to decrease," federation analyst Zhang Liqun said. But he said the results of the survey did not suggest China would face a "deeper correction."

In September 2011, AFP reported, Chinese Premier Wen Jiabao said China’s growth would slow in the long term as it reached a "new stage of development", and pledged to increase domestic consumer demand. "China's development is not yet balanced, coordinated and sustainable; there are many institutional constraints hindering scientific development," he said. "As the size of the Chinese economy grows, it will become difficult to keep high-speed growth over a long period of time...We have the right conditions and we have both the ability and confidence to maintain steady and fast growth of the economy and bring China's economy to a new stage of development." [Source: AFP. September 14 ,2011]

The earthquake and tsunami in Japan had a slightly averse affect on the Chinese economy, depriving some industries or crucial components — namely auto parts, steel materials and integrated circuits.

Analysts say too much of the country’s growth continues to be tied to inflationary spending on real estate development and government investment in roads, railways and other multibillion-dollar infrastructure projects.

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated April 2012

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