China NPC Underlines Inflation Focus

The course of true love never runs smooth…..Happy China couples get divorced and then plan to remarry in order to avoid new property tax

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Source of picture: Quirky China News/Rex Features

 

By John Richardson

China will see “large inflation pressure in the second half of the year,” said a People’s Bank of China official on the sidelines of the National People’s Congress (NPC).

But he believed that the official target of 3.5% inflation for 2013, lower than the 4% target set for last year, could be met if swift action was taken to control money supply.

To this end, outgoing premier Wen Jiabao announced during the NPC that a 13% growth target for money supply had been set for 2013 compared with 12% last year.

The NPC was thus used to further underline what Beijing made clear last week: A new tightening phase.

The renewed battle against inflation is not expected to any time soon require an increase in interest rates or bank-reserve requirements.

This is, perhaps, good news given that both of the above measures badly dented petrochemicals demand growth from April 2011 until Q2 2012.

A problem, however, as The Wall Street Journal points out is that “central banks around the world are easing policy and keeping interest rates at extraordinarily low levels. Many Chinese commentators argue that this global easing is pushing up inflation in China as speculative capital flows in, chasing higher returns.”

The policies of the Federal Reserve, the European Central Bank, and more recently the Bank of Japan, are all odds with China’s renewed battle against inflation.

The developed world seems likely to throw more, rather than less, liquidity at its economic growth problem.

This could force China to take more severe measures to bring the rising cost of living under control. Plus, of course, there is a risk to international relations.

Meanwhile, the clampdown on the 10,000 lb inflationary gorilla in the corner of the Chinese room – the property sector – has led to a jump in the divorce rate.

The 20% property tax is to apply to second properties bought by married couples. But, if the couples separate they can buy one home each and thus avoid the tax. They can then remarry.

Property sales have also jumped ahead of the introduction of the tax because, as the Financial Times points out, property is central to the Chinese economy “with vast amounts of the population’s wealth tied up in the values of their homes”.

There are two risks here, which are:

1.) The government fails to rein in the property sector because of other innovative efforts to avoid new regulations This might be good news for growth in the short term, but will worsen inequality and the scale of the potential correction if the bubble eventually bursts.

2.) The government succeeds and in so doing, GDP growth is lower in 2013 than the official 7.5% target.

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