Research On China’s Imported Inflation

Inflation refers to a general increase in the price level of an economy over a period,which would deteriorate the purchasing power of currency.In the era of globalization,inflation of different economies shows a certain characteristic of synchronization.For example,from the 1970s to the early 1980s,the western world generally suffered from the so called "stagflation",with stagnant economic growth and high inflation.In the 1990s,central banks in many countries began to adopt an inflation targeting policy,taking a certain inflation level(usually 2%)as monetary policy target.Since then,inflation in major economies has been at a relatively moderate level,and economic fluctuations have also been relatively stable.This period is known as the "Great Moderation Period".After the 2008 global financial crisis,main economies began to face the pressure of low inflation,even though central banks like ECB and FED implemented quantitative easing policies.The year-on-year CPI growth rate in the United States and Japan fell to below zero in 2015 and 2016,while inflation in the euro area was also no more than 0.2%.During this period,China’s inflation has also gradually declined,and it has long been below 2%from 2014 through 2017.Since 2021,with the rise in global commodity prices,global inflation has begun to show signs of rising.Among major economies,inflation in the United States and the euro area has continued to rise,and Japan has also recovered from deflation and returned to an above zero inflation level.As China’s economy gradually integrate with global economy,its price level is increasingly affected by international factors,which to a certain extent has brought new uncertainties to the domestic economy as well as central bank’s monetary policy making.In response to this phenomenon,many scholars have studied the impact of international factors on China’s inflation from the perspectives of imported commodity prices,exchange rate changes,monetary policy synchronization,or economic cycles,and affirmed that foreign factors do have impacts on China’s inflation.However,there are still some questions unanswered by existing research:First,for import trade,previous studies have mostly focused on the impact of commodities like petroleum prices,ignoring that high-tech products such as chips also occupy a large share of China’s imports.Whether these high-tech product prices would have great influence on domestic price is still to be settled.Secondly,after the "8.11 Exchange Rate Reform" in 2015,the central bank has gradually withdrawn from its constant intervention of the foreign exchange market.Has this changed the impact of balance of payments surplus on the domestic money supply and henceforth the level of inflation?There has not been much research yet.Lastly,previous studies have confirmed the impact of the international output gap on domestic inflation,but few have revealed the mechanism behind it.This paper begins with comparing China’s inflation index and some commodity prices with those of foreign counterparts,and distinguish commodity prices and inflation index that closely related to global factors from those that fluctuate relatively independently.Next,this paper studies the three channels that China may import inflation:import trade,central bank balance sheet and phillips curve.First,we study how would changes in the structure of China’s imported products impact imported inflation through trade channels.By analyzing the customs import data since 2000 and classify imported goods by their technology level as per Lall(2000),this paper finds that resource based low-tech commodities such as petroleum and hightech products such as chips are the two categories that we import most.However,when looking into the type of trade of each category,this paper finds that there is always a high proportion of processing trade for high-tech product imports.The characteristics of the processing trade implies that the prices of such imports will not affect the domestic price,as all imports are to be processed and exported thereafter.This weakens the impact of changes in the price of high-tech imports on domestic prices.Resource based low-tech commodities are mainly of general trade.What’s more,as these commodities are input at the upstream of the industrial chain,their price will affect the production costs of all industries in the downstream and thus would have a broad impact on the overall price level.Considering all those mentioned above,we figured that inflation imported from trade channels is mainly by low-tech products such as petroleum and iron.Next,using non-competitive input-output table,we confirm that the impact of the import price of high-tech products such as computers on the prices of various domestic sectors is significantly weakened when the proportion of processing trade in the import of each product is considered.The test results of the VAR model also confirm that the impact of the import price of primary products on inflation is significantly greater than that of industrial products.Afterwards,using provincial panel data,we further verify that the increase in the proportion of low-tech products in import not only strengthens the impact of commodity prices on inflation,but also enhances the impact of import price on domestic inflation in general.Second,we study how does the change of the exchange rate regime influence the central bank’s currency issuance method,and hence the way that the balance of payments affects the domestic price level.Under the compulsory foreign exchange settlement policy,the issuance of huge foreign exchange funds due to surplus in the balance of payments has become the main channel for the central bank to release base money,especially after China’s entry into WTO in 2001.However,after the "8.11 exchange rate reform" in 2015,the central bank gradually withdrew from its intervention in the foreign exchange market,thus cutting off the channel for the balance of payments to affect China’s base money issuance and thus inflation.China’s monetary policy has gained greater autonomy.This paper first analyzes the impact of changes in central bank’s balance sheet(currency issuance method)on inflation theoretically.Then,through the impulse response analysis of the VAR model,it was confirmed that the change of foreign exchange funds after the "8.11 exchange rate reform" gradually lost its influence on inflation;Finally,through the econometric model,this paper confirms that China’s balance of payments surplus once affected inflation by affecting the central bank’s currency issuance,but this channel no longer exists after the exchange rate reform.Third,we investigate whether the degree of openness is related to the impact of international output gap on domestic inflation under the expanded Phillips curve framework.This paper introduces international output gap into the traditional Phillips curve model,and constructs an expanded Phillips curve model including inflation expectations,domestic output gap and international output gap,indicating that international output gap has a positive impact on inflation.Next,this paper conducts an empirical test on China’s extended Phillips curve model,and the results show that the coefficient of international output gap is significantly positive.In order to verify whether the impact of the international output gap on domestic inflation is related to the degree of openness,this paper uses the proportion of foreign trade to GDP as a measure of the degree of openness,and compares the extended Phillips curve of OECD countries to South American economies.It finds that for OECD countries,domestic inflation are more affected by the international output gap,while for the relatively closed South American economies,the role of the domestic output gap is more significant.Based on the above results,we put forward the key viewpoints:While the central bank changes its currency issuance method and improve its monetary policy independence,and the dual-cycle development strategy is gradually established,the price of commodities may become the main international factor affecting China’s domestic market price under the import trade channel in the future.Finally,this paper puts forward advices for China to deal with imported inflation,including paying special attention to changes in international commodity prices,monetary policy regulation should mainly focus on CPI rather than PPI,enhancing the marketization of the RMB exchange rate regime to improve the independence of central bank’s monetary policy,being wary of the impact of sharp fluctuations in foreign output on the domestic economy.However,there are still some deficiencies in this research.There are omissions in the investigation of imported inflation channels,it also fails to quantitatively describe the degree of imported inflation.Since China’s economy has been deeply integrated into the world economy,its inflation may be closely related to the inflation of major global economies in the future.Therefore,it is of great significance to conduct further research on China’s imported inflation.