From Controlling Inflation To Restraining Deflation

Macro-economic policy is the primary tool in the hands of government for the adjustment and intervention of national economy. In the development of market economies in the West, there were constant disputes between the freedom of market (or laissez-faire) ideology on the one hand, and government intervention in economic affairs on the other, and two differently oriented policies were adopted by different nations. Towards later twentieth century, however, these two contradictory policy orientations gradually arrived at an eclectic standing, and in practice these two policies were alternately employed to complement each other and combined into a more comprehensive system of policy measures. As China's economy is a market economy in its nascent form, a developing big economy, a transforming one and also becoming increasingly open to the outside world, the macro-economic policy it adopts possesses a particular historic significance worthy of our examination. In this paper, by selecting an important interval of time 1988—2002 as background, the author attempts to analyse what China did to combat both inflation and deflation in this difficult and critical period.In the period immediately before and after 1990, China was plagued by inflation. Therefore during 1993—1996, the macro economic policy adopted was to control inflation and to realize a "soft-landing" of the economy on level ground. The government started with rectifying the existing financial disorder, carried out a moderately contractive monetary policy which was supplemented with a tight fiscal policy and necessary administrative and legal measures in order to avoid violent fluctuations often associated with economic adjustments. The result was stable economic growth at the same time of effective check of inflation and realization of "soft-landing". After that, however, China's economy entered a new stage characterized with deficient effective demand and aggravation of deflation. This became a new factor obstructing economic growth. To emerge from this situation the government took steps to expand domestic demand and turned determinately from a moderately contractive monetary and fiscal policy to an active fiscal policy and a steady monetary policy. During 1998—2002 these policies were carried out with satisfactory results. Through the above two occasions of macro-economic adjustment and co-ordination, we accumulated useful experiences not only in combating inflation and in soft-landing, but also in acquiring a new understanding on how to expand domestic demand and deal with deflation. The experiences in these too battles are precious. They are treated in detail in chapters 2 and 3. Coincident with the implementation of macro-economic adjustment and co-ordination, some important theoretical and practical problems were constantly debated. The unfolding of these debates, however, actually added to our knowledge and led to theoretical innovations in macro-economic policy studies. They are also examined and briefly commented.It is clear that the chief weapons for government intervention are fiscal and monetary policies and their correct manipulation. But these two policies possess functions of their own. What are the appropriate measures and conducting mechanism to choose and how to coordinate them to achieve the desirable results? Considering their effects and influences how to choose the proper combination at different conjunctures? How to coordinate short-term and long-term, internal and external objectives? All these are problems which should be seriously considered both in policy-making and implementation. They are discussed in chapter 4 and some general conclusions are drawn.A salient feature of China's micro-economic control since 1990s was to keep the harmony between the short term policy target and the intermediate and long-term diretions of economic reform. That is to say, the progress of reform and open policy must keep pace with the perfection of macro control and coordination systems. Since 1992, taking the establishment of the soc...