China's National Economic Accounting and Economic Growth Research Center under Peking University released the "China Economic Growth Report 2011" on May 21. The report said that judging from the current macroeconomic imbalance in China, China is faced with both inflationary pressure and the risk of sluggish growth. China needs to prevent stagflation by controlling the gross unbalance in the current stage.

The report shows that in regard to the total demand, China implemented a package of measures to expand domestic demand starting from the second half of 2008. According to the policy delay on inflation, the liquidity of investments will generally manifest itself as inflation in six to 24 months. Therefore, the inflationary pressure caused by policy measures aimed at expanding domestic demand that appeared from the second half of 2008 to the first half of 2010 will be gradually released no later than the end of 2011 to the first half of 2012.

The key is whether the Chinese government can effectively and in a timely manner stimulate the real economy to grow before the policy of expanding domestic demand releases the inflationary pressure. If the government can fully stimulate economic growth, it can increase deflation and effectively control inflation even if there is higher inflationary pressure. Otherwise, high inflation may appear along with low economic growth.

In terms of overall supply, more than 30 years of the reform and open door policy have had two effects on continuous economic growth.

First, more than 30 years of development has expanded China's economic scale enormously, and it has also come with institutional and technical innovation as well as increased efficiency. Second, more than 30 years of high-speed growth has also changed the relationship between the supply and demand of production factors. Given the scarcity of production factors, sustained high-speed economic expansion will inevitably result in a surge in demand and a rise in the costs of production factors, pushing up the costs of the entire economy.

The key issue is whether the improvement in the efficiency during the process of development can outpace the related rise in costs. If not, it will cause China to fall into the "middle-income trap" in the long-term and will turn the demand-driven inflation into the demand and cost-driven inflation in the near-term. The economic growth characterized by low efficiency and high costs will be unsustainable and inevitably cause stagflation.

By People's Daily Online
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