When the Western world experienced unprecedented high inflation and low growth, economic decision-makers chose to tackle "the lesser of two perils" - sidelining economic growth to concentrate on beating back inflation.
Today the US economy appears to be on the brink of stagnation again, while China seems to be faced with the same challenge.
China's economy definitely needs to slow down. Decades of sustained rapid growth has kept the nation in a constant struggle to meet soaring demands for coal, electricity, oil and transportation. The supply crunch has persistently prevented efforts to curb negligence in production safety, particularly at coal mines.
The toll on the environment has been mounting as well, as financial losses from pollution have also increased.
The fruits of economic growth has not been widely shared. The pace to bridge the divide between the rich and the poor is slow. Decades of export-driven growth has pushed the country's outward development to a critical stage; while increasing international trade disputes keep adding pressure on the diplomatic front. So China's economic growth pattern must be adjusted as soon as possible.
Under increasing pressure from soaring oil prices, the subprime crisis, and flagging consumer spending, the US economy is bound to slow down and the possibility of a recession cannot be ruled out. As the main engine of the world's economy and the most important market for everything made in China, the US economy may not seriously affect China's economy every time it "sneezes", but China simply cannot remain totally unaffected when Japan and Europe are also suffering from the "common cold", which means more or less the whole world is "feeling under the weather".
The World Bank estimated in its 2008 World Economic Outlook published on January 8 that China's economic growth rate this year will be 11 percent. But, less than two months later, it revised its estimate to 9.6 percent. It is the first time an authoritative international economic institution has revised its estimate of China's growth rate to less than two digits.
Of course the World Bank is not the only one to do so. The International Monetary Fund (IMF), the Organization of Cooperation and Development and such private institutions as the Lehman Brothers, Morgan Stanley and Goldman Sachs all joined the chorus of gloom soon afterward.
For China, however, the problem is not just slowing economic growth but inflation as well. The country's consumer price index (CPI) began to rise at an accelerated pace in the second half of last year, hitting over 6 percent in all months but July, when it rose by 5.6 percent, with November registering a 6.9 percent surge. The annual increase of the CPI last year stood at 4.8 percent, 3.3 percentage points over that of 2006.
The CPI climbed to 7.1 percent in January this year for a historic new high; while urban inflation rose by 6.8 percent and rural 7.7 percent. The top "jumpers" so far have been food prices with the average increase being 18.2 percent year-on-year. Among them pork leaped by 58.8 percent, meat, poultry and related products 41 percent, vegetables 13.7 percent, fruit 10.3 percent and marine produce 8.7 percent. The price hikes experienced by the average consumer were even bigger.
The risk of inflation is not inflation itself but what people make of it. Decision-makers tend to regard the emergence of inflation as a short-term random development rather than a long-term structural problem and usually focus their attention on the so-called structural price hikes. Because of this the policy responses tend to be cosmetic with little effect, and inflation is allowed to rear its ugly head slowly.
It can be expected that China may find itself trapped in "high inflation" and "slow growth" as the pressure of inflation increases and the government will be faced with greater challenges trying to keep a balance between the two.
Since the start of reform and opening up to the outside world, China's economy has been growing at an annual average of nearly 10 percent, and 10.6 percent in the past five years, which is more than five percentage points above the world's average. Another achievement that we are proud of is that our GDP soared from over 1.2 trillion yuan in 2002 to more than 2.4 trillion yuan last year to become the fourth largest economy in the world. Today, as the economic growth rate slows down, some of the advocates of "the faster the better" have begun to look worried about the growing pressure on employment and the prospects of surpassing those ahead of us. It is just another habitual way of thinking.
This writer believes China's economic slowdown will help the macro-economy rebalance itself and return to normal natural growth, as unnaturally fast growth is abnormal. It will help correct the unbalanced economic growth pattern characterized by over reliance on export and investment, and gradually bring it around to domestic demand-driven growth. It will also allow the country to concentrate on addressing the imbalance in social development, alleviate social conflicts and realize scientific development.
Over reliance on export and investment leads to macro-economic distortion while polarization increases social tension, both of which make employment difficult. Unemployment pressure should be dealt with when the economy is "back to normal" and on the basis of alleviating social conflicts.
China's economic slowdown can help reduce the danger of real estate and stock market bubbles and offset the tremendous pressure on natural resources and the environment by out-of-control economic expansion. That means how to recognize and address the growing inflation should be the focal issue, not economic slowdown.
The author, Jiang Yong is a researcher with China Institute of Contemporary International Relations.
(China Daily, March 20, 2008)