Internal debate intensifies

=EN-US style="font-size:10pt">Just a very quick post today, largely consisting of two news articles.  The first comes from Xinhua. 

Yesterday, according to the article, Li Yining, a leading economist and member of the all-important Standing Committee, told the Second Meeting of the Standing Committee of the 11th NCCPPC, the country's political advisory body, that:

China is facing a pressing challenge of preventing inflation turning into stagflation.  He said stagflation, the co-existence of high unemployment and high inflation, might occur if improper measures were taken to fight inflation so as to disrupt market expectations, or the economy failed to survive the global slowdown…

The economist said China should continue to take a firm grip on the country's foreign exchange flows, and be alert to problems that might occur in the context of a global slowdown given the huge forex reserves.

He said the government should not over-reach itself in fighting inflation or be misled by the concept that only a low inflation rate would be a complete success in the anti-inflation campaign.

"The inflation rate, if controlled at about 60 percent of the growth rate, would be appropriate, such as keeping the rate at around six percent for a 10-percent growth in economy," he said.

I don’t have an awful lot to say about his comments except that his warning of stagflation risks is even more interesting to me because of the play it got in the Chinese press (The very large headline is “Economist warns of stagflation risks to China”).

The second article, first pointed out to me by blog reader Jonathan Lerner, appear in various forms in a wide number of papers.  The best account I think was Denise Tang’s “State academics push temporary yuan free float” in the South China Morning Post.  She says:

China should temporarily let its currency float freely to control runaway inflation and speculative capital inflows, said two government-backed academics, rekindling the debate on the politically sensitive issue.  He Fan and Zhang Yue of the Chinese Academy of Social Sciences see the temporary free exchange of the yuan as a quick and cost-effective way to thwart speculation, especially as inflation rises and the room to tighten monetary policy shrinks, according to their commentary in China Securities Journal yesterday.

The government think-tank academics painted a gloomy picture for inflation in consumer and producer prices, and they warned of a cash crunch at companies as well as a possible jump in banks' non-performing loans as side-effects of existing currency measures.

As Jonathan points out in his email to me, major policy changes, especially on economic and financial issues, are almost always preceded by non-official or quasi-official commentary and debate in the official press.  That doesn’t mean, of course, that they are about to float the RMB, but it does mean that there is some discussion and debate going on in policy circles about what is, after all, a pretty sensitive topic.  I would assume that academic researchers with CASS are unlikely to propose something that seems so radical without some sense that there are people in the government willing to listen.

I don’t want to read too much into this, but if we see more articles along this line it would be significant.  By the way, one way of interpreting the debate about a free float is in the context of the debate over a one-off currency revaluation.  The more extreme idea of a free float may make it easier to reach a compromise position on the amount of revaluation necessary.