China's Looming Crisis--Inflation Returns

Publication Date: September 2007

Publisher: Carnegie Endowment for International Peace

Author(s): Albert Keidel

Research Area: Banking and finance; Economics

Type: Brief

Coverage: China

Abstract:

The Chinese government must move quickly and dramatically to increase interest rates to reduce the risk of an inflation crisis, says a new policy brief from the Carnegie Endowment. Albert Keidel, an expert on China's economy, urges the Chinese government to avoid the danger of harsh corrective steps which in the past caused severe declines in GDP growth, fueled deadly urban civil unrest throughout the country, and brought long-lasting damage to China's international reputation.

In China's Looming Crisis--Inflation Returns, Keidel argues that political disputes between competing interests groups could hold up adjustments to China's government-administered interest rates. A delayed response could be dangerous, however, as both public and corporate bank deposits are already losing purchasing power. Value-losing deposit rates in the late 1980s and mid 1990s sparked heavy bank withdrawals and accelerated consumer spending--pushing inflationary pressures to the crisis point.