China's Deflation Problem Study

Deflation has been a new major issue troubling Chinese economy since the late 1990s and a major subject of study. This dissertation made a systematic analysis of deflation and arrived at a more innovative understanding and conclusions about this issue, thereby contributing to the further exploration on this subject in the following aspects:This dissertation contributed to the theoretical discussion of deflation in the following areas: 1. The author classified the various definitions about deflation put forward by Chinese and foreign scholars. The author pointed out the deficiencies with the existing definitions and tries to define deflation in the way it should have been defined. 2. By bringing to light the true nature of deflation in China, the author believes that the deflation in China is, for the most part, not monetary, but a product of the changes in the real economic variables.3. The author conducted a comparative analysis of the aggregate supply and demand and found that the shrinkage in the aggregate demand, rather than a serious surplus of the aggregate supply, is the real cause for a bigger aggregate supply than aggregate demand in China in the late 1990s.4. Through in-depth analysis of the causes behind the shrinkage in consumer demand, the author concluded that, apart from the causes commonly accepted by the academia such as the decline in the growth rate of current income, uncertain expected income, increase in expected expenditure, near saturation of the present consumer items of urban residents, and the difficulties for a new consumption structure to come into being. Other factors have also contributed to the shrinkage in consumer demand, including the consumption effect of monetary illusion with respect to price reduction and the various issues that have emerged in the economic transitional period.5. The formation of deflation in China is not only due to causes in the aggregate supply and demand within the economic system, but also to inappropriate government policies and the impact of Asia's financial crisis. This dissertation revealed the causes in these two respects.6. The author made a thorough analysis of the intensifying effect of consumer expenditure due to monetary illusion on the economic performance and put forward the viewpoint that the consumption effect of monetary illusion is "the booster to economic operation".7. The author stressed the importance of the velocity of money circulation and modified the conventional computing method for the velocity of money circulation.8. The author also made an in-depth analysis of the shortcomings in demand management and the limitations in monetary policies.As for solutions to the afore-mentioned issues, the author suggests:1. The most fundamentally effective way to tackle deflation in China is to expand demand. The key to expanding consumer demand in urban areas is to increase employment, perfect social security system, boost entrepreneurial spirit, minimize the psychological dependence of citizens on government support, readjust and change their expectations. The key to expanding demand in rural areas lies in raising the income of rural residents. The effective ways for doing so consist of enhancing the productivity of agricultural laborers, reducing the cost of agricultural products, readjusting agricultural structure and developing non-agricultural industries. At the same time, the author analyzed the consumer goods and services with growth potentials.2. The enlargement of investment demand should mainly be private investment. Tax reduction has proved to be the most effective way to enlarge private investment. The enlargement of private investment depends on the increase in after-tax income and, to certain degree, tax reduction will increase the after-tax revenues of enterprises. So, tax reduction is a sure way to stimulate private investment.3. Supply management, being different from demand management, will not only promote economic growth but also pr...