Spot the odd one out. China’s broad money supply has been increasing at an average annual rate of 25 per cent since January 2009. Gross domestic product grew at a 12 per cent rate in the first quarter, and just over 10 in the second. The official index of annual consumer price inflation, meanwhile, registered just 3.5 per cent last month.
Rampant price rises helped bring down the Kuomintang in the late 1940s. Could the current government be trying to avoid that fate by cooking the books? Certainly, the National Bureau of Statistics’ CPI basket looks like no other, lumping together items such as recreation and education along with “cultural articles and services.” The headline figures often jar with on-the-ground evidence, such as the surge in the price of a foot-rub or a KFC meal.
But the official reading may not be so far off, despite the much more rapid increase in the money supply than in GDP. The ultra-low benchmark one-year bank deposit rate – held at 2.25 per cent since December 2008, and below CPI since February – provides a partial explanation. As Beijing-based finance professor Michael Pettis points out, low yields transfer income away from net savers (Chinese households) in favour of net users of capital (big state-owned enterprises and local and central governments). So long as households provide this subsidy, the inflationary impact of rapid M2 expansion can be contained.