Authority on Economics: Gregory C. Chow

Combat high inflation with serial appreciations

Being an economic policy consultantfor the former President Jiang Zeminand former Premier Zhu Rongji of thePeople’s Republic of China, Professor GregoryC. Chow, a renowned econometrician alwayshas in-depth and unique analyses of China’smacro economy. His data collections, particularlyfor those about the price, the total money supplyM2 and real gross domestic product of MainlandChina between as early as 1952 and 2009,indicating how different generations and inflationexpectations influence the price in markets reallycontribute much to the econometrics of China’seconomy and even that of the world.

Suggest revaluing Yuan by 20%
Facing forecasts of overheating economy in Mainland China this year, including a total economic size of nearly USD 5 trillion and GDP growth reaching 9.6%, people in the market worry that China’s economy will have a hard landing. Pursuant to the National Bureau of Statistics’ announcement about the data of China’s macro economy for the first quarter, gross domestic production (GDP) increased 9.7% and for the consumer price index in March, it also rose by 5.4% as opposed to the preceding month, hitting a nearly three-year high. China’s central bank monetary policy committee expert member, Xia Bin expressed publicly that the central government hoped to enlarge the yuan exchange rate floating zone gradually, and more likely to have a one-off appreciation of yuan. A well known Chinese American econometrician, Gregory C. Chow, who is also the current professor of political economy and honorary professor of economy at Princeton University in U.S, stressed in an interview with that the Chinese central government already has in mind effective policies to combat the inflation that would enable China’s economy to have a stable and soft landing; yet, it is subject to whether the government could get rid of the former political and economic shackles and that mainly lies in the yuan exchange rate and foreign exchange reserves. Chow believed that a 20% appreciation of yuan should be introduced in order to solve the problem of inflation and it would be more effective with the use of a certain amount of foreign exchange reserves.

The appreciation of yuan is not a bad thing at all times as it can prevent the trade surplus from rising and slow down the inflow of foreign exchange. But the problem is that the inflow of foreign exchange is an important factor in the growth of China’s money supply and such growth can cause inflation. The main concern is whether the inflation is virtuous or vicious. “The financial reserve of China is really too much”, Governor of People’s Bank of China’s, Zhou Xiaochuan stated earlier. Zhou is studying to establish a professional fund which is responsible for different areas of the foreign exchange management. As for Gregory C. Chow, he suggested the central government can use a certain proportion of its USD 3 trillion foreign exchange reserves as correspondingly large capital expenses for China’s western development and the Twelfth five-year plan.

Bulk purchase of U.S. goods with foreign exchange reserves
Chow believed that if China utilizes parts of her foreign exchange reserves to purchase U.S. goods directly, it will not only help boost the total demand of U.S. economy, but also allow U.S. to rebound from the integrated-economy downturn. It will then bring a complementary effect to both countries. He admitted that U.S. would not allow China to purchase all kinds of her goods, at least not the military and high-tech products. However, only if China be able to purchase U.S. goods with her huge foreign exchange reserves in a proper way, it is just equivalent to decreasing China’s continually holding of depreciating U.S. bonds and that can prevent China from suffering unnecessary loss of her foreign exchange reserves and becoming America’s largest creditor.

Gregory C. Chow added that the appreciation of yuan could help slow down the growth of foreign exchange reserves and with this not only would the money supply liquidity be slowed down, the internal economic problems like bubble in property and asset markets would also be eased. This could be regarded as a policy of win-win situation for both Mainland China and U.S. Yet, if the People’s Bank of China remains yuan’s current exchange rate, it will not only continuously attract more foreign capital inflows and generate large foreign exchange reserves, the basic problem of exchange ratio also will not be solved thoroughly. The Chinese central government’s regular enhancement of bank deposit reserve ratio, issue of central bank bills and raises of interest rate adjustment for monetary tightening will become ineffective as well. Chow also estimated the inflation in Mainland China can hardly go down temporarily and return to the official inflation target of 4% level.