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Costs of China's rapid economic growth: Inequality and inflation

08-01-2011 17:55 BJT

After years of exceptional growth, China has become the fastest growing, major economy in the world. But the speedy growth hasn't come cheap, as inequality and inflation rises. As China's economy readies for a transitional period, which will ensure more balanced, sustainable growth, Chen Guang takes a look at how the country can avoid a hard landing.

China's economic miracle of the last 3 decades has been impressive to say the least.

But amid the rapid growth, came increasing challenges.

A Chinese shop assistant arranges the price cards at a supermarket in Hefei, east China Photo: AFP/Getty Images

In June 2011, China's CPI reached a 35-month high of 6.4 percent.

Stabilizing prices has become the country's main priority for the second half of the year.

However, the tightening measures have ignited fears of a hard economic landing and resulted in financing difficulties for small- and medium-sized enterprises.

Government data shows that the country's economic growth slowed to 9.5 percent in the second quarter of this year from 9.7 percent in the first quarter and 9.8 percent for the fourth quarter of last year.

Zhu Baoliang, chief economist in State Information Center said, "One concern is that a harsh price-control policy will break all bubbles in all the property market. This, in turn, will lead to a sudden economic slowdown, causing a hard landing for China's economy."

Problems of an overheating economy date back to 2008, when a stimulus plan caused a series of price hikes in sectors such as oil, coal and electricity.

Zhu said, "Starting from 2010, the global economy began to pick up. Against such a backdrop, slowing down economic expansion in China seems an uphill battle."

The government is targeting an economic growth rate of 8 percent for this year and plans to keep annual consumer price increases at around 4 percent.

To put a lid on price hikes, the central bank has raised its benchmark interest rates three times this year and increased its reserve requirement ratio six times. It has also ordered banks to keep a record high of 21.5 percent of their deposits in reserve,to drain excessive money out of the market.

These measures began to take effect in 2009.

Some observers attributed the gradual moderation to a continued investment growth slowdown, as the country's prudent monetary policy gives less support to investors than the relatively loose monetary policy that was previously in place.

Experts predict the economic slowdown in the second half will probably be bigger than that of the first half of this year.

Cai Jin, vice president from China Logistics and Purchasing Federation said, "These macro-economic measures can wipe out some of the bubbles created during the last round of economic overheating."

China's economic development is now shifting to domestic consumption led growth, which is positive and necessary for its economic restructuring.

The government should not relax policies because of a slowdown in growth, or inflation will accelerate and economic restructuring will be set back.

Experts say inflation in China can ease in the second half of this year, given that no food shortages occur and the government maintains a prudent monetary stance.

Editor:Li Wanran |Source: CNTV.CN

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