Dan Steinbock

Fighting soaring oil prices and inflation

By Dan Steinbock (China Daily)
Updated: 2011-03-24 07:58

But such measures can lead to distortions in capital markets and are often resisted by influential interest groups. In some countries, overheating has led to a paced increase in the exchange rate to ease inflationary pressures. Such revaluation of currency, however, affects primarily the prices of traded goods. Moreover, a rapid revaluation of the yuan would prompt commodity providers to raise their invoice prices accordingly.

Coupled with rapid wage increases, a fast revaluation of the yuan would pose a serious challenge to business.

Since all options have trade-offs, Chinese decision-makers have to make their choices in an extremely challenging environment. Adjusting monetary policies will be very difficult in an interdependent global economy, which is coping with US stagnation, Eurozone debt crisis, Japan's triple disaster, and rapidly-changing situations in North Africa and the Middle East.

The Chinese government has paid attention to people who are most vulnerable to rising inflation caused by oil price hikes. In February, for instance, gas price in Beijing rose to 7.45 yuan a liter. The government should provide subsidies to low-income families, taxi drivers, and other sections of society that could be hurt by price adjustments. Energy subsidies cannot be withdrawn quickly because that would reduce social cohesion.

On the other hand, subsidies are unlikely to offset higher oil prices paid by cabbies, and energy subsidies will not be viable in the long-term. In 2010, China's reliance on imported oil climbed from 33 percent to 55 percent. In the coming decades, this dependency will increase further.

In the 19th and 20th centuries, the industrialization and urbanization of the ascendant Western economies - the United States, Western Europe, and Japan - greatly benefited from relatively low energy prices. In contrast, China and India, with their large populations, cannot hope to duplicate an economic model that relies on high consumption of energy.

Coping with soaring oil prices and inflation is a balancing act between short-term relief and long-term sustainability. China seeks to do its share. But so should the advanced economies.

The author is research director of International Business at the India, China and America Institute, an independent think tank in the US, and visiting fellow at Shanghai Institutes for International Studies.

(China Daily 03/24/2011 page9)