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China Inflation
One of the most striking manifestations of economic instability
in China in the 1930s and 1940s was runaway inflation. Inflation
peaked during the Chinese civil war of the late 1940s, when
wholesale prices in Shanghai increased 7.5 million times in the
space of 3 years. In the early 1950s, stopping inflation was a
major government objective, accomplished through currency reform,
unification and nationalization of the banks, and tight control
over prices and the money supply. These measures were continued
until 1979, and China achieved a remarkable record of price
stability. Between 1952 and 1978, retail prices for consumer goods
grew at an average rate of only 0.6 percent a year.
During the reform period, higher levels of inflation appeared
when government controls were reduced. The first serious jump in
the cost of living for urban residents occurred in 1980, when
consumer prices rose by 7.5 percent. In 1985 the increase was 11.9
percent, and in 1986 it was 7.6 percent. There were several basic
reasons for this burst of inflation after thirty years of steady
prices. First, the years before the reform saw a generally high
rate of investment and concentration on the manufacture of producer
goods. The resultant shortage of consumer commodities caused a
gradual accumulation of excess demand: personal savings were
relatively large, and, in the late 1970s and early 1980s, there was
a booming market for such expensive consumer durables as watches
and television sets. Second, the real value of many items changed
as some resources became more scarce and as technology altered both
manufacturing processes and products. The real cost of producing
agricultural products rose with the increased use of modern inputs.
Manufactured consumer goods that were more technologically advanced
and more expensive than those previously on the market--such as
washing machines and color television sets--became available.
During the early 1980s, both consumer incomes and the amount of
money in circulation increased fairly rapidly and, at times,
unexpectedly. Consumer incomes grew because of the reform program's
emphasis on material incentives and because of the overall
expansion in productivity and income-earning possibilities. The
higher profits earned and retained by enterprises were passed on to
workers, in many cases, in the form of wage hikes, bonuses, and
higher subsidies. At the same time, the expanded and diversified
role of the banking system caused the amounts of loans and deposits
to increase at times beyond officially sanctioned levels, injecting
unplanned new quantities of currency into the economy.
Data as of July 1987
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