Xia Bin and Gao Shanwen

When people look back at the past year and look ahead to 2004, the focus of discussion has been gradually shifted from whether the economy is over-heated, or whether it is generally normal but partially overheated to the inflationary trend of 2004 and the economic policy for 2004. This article intends to forecast the rational range of the target value of monetary policy regulation by analyzing the inflationary trend in 2004 as well as the possible negative factors that may affect the economic growth in the year.

I. Estimation of Inflation in 2004

1. Possible trend of grain price

Deducting the China factor, the global grain reserve is at the lowest level since 1996, which is 6.5 percentage points lower than the average historical level of 20.4%. The proportion of global grain reserve in the grain consumption of the current year declined from 19.6% in 2001 to 13.9% in October 2003, representing a decrease of 5.7 percentage points and approaching the lowest level of 13.2% since 1995. The decline of the proportion of grain reserve in the consumption of current year will inevitably lead to the rise of grain price, which is an inevitable law proven by years of practice. It also indicates that there is not much leeway for China to satisfy the domestic demand through increasing imports without a drastic rise of international prices.

At the same time, China’s grain output has been continuously decreasing since 1999, being unable to meet the demand of consumption of current year and leading to the drastic decline of reserve. In 2003, the country’s grain reserve accounted for less than 30% of the current year’s consumption, which was at the lowest level since 1974 and about only half of the average level of 59.4% in the past 30 years. In 2003, the supply-demand gap was as high as 13.4% of the current year’s consumption. If the reserve were not adjusted, and the grain consumption could not increase in 2004, the grain output should be raised by 15.5% over 2003 in order to ensure the price stability. But according to historical statistics, the year that reported the bumpiest harvest saw a growth of less than 11%. Under the most optimistic scenario, the shortage this year will need to be covered by consuming about four percentage points of grain reserve.

The possibility of not triggering price rise of grain while the reserve continues to decline from such a low level is slim. At the same time, it will take two years and more to expand the grain production until the demand is met, and it will take even longer time to restore the reserve. So it will be very likely that the grain price would keep rising in the next two to three years. From another point of view, expanding grain production requires farmers’ higher enthusiasm for production, which also needs to be realized through higher grain price, which, in turn, will be conducive to reducing consumption of grain.

The decline of grain output since 1999 was possibly caused by the reduction of farmland as well as the continuous decline of price and a large number of migrant workers. Therefore, under the irreversible condition of returning farmland to forests and increasing number of floating rural workers, it will be very possible for the state to use the price lever and other input measures to expand grain production.

In consideration of the estimates of the Food and Agriculture Organization of the United Nations, we believe that the uncertainty lying in the above prediction might be the overestimate of China’s grain consumption by relevant data, thus underestimating the actual grain reserve. But it should be certain that the grain reserve is at the lowest level in years. In other words, if the historical average reserve is used as a yardstick to make the prediction, the rise of grain price will be hard to avoid. The uncertainty may be just the degree of the price rise.

From the historical data about the grain price changes in China, we can see that the grain price under the Retail Price Index rose about 3-5% in the years since 1988 when grain price went up. In consideration of the current fairly low level of grain reserve, we estimate that the grain price in 2004 is likely to rise at about 5% or more. Although the proportion of grain in China’s Consumer Price Index (CPI) is not made public and often adjusted with the consumption structure, we predict that CPI would rise by 1.7 percentage points in 2004 due to the grain price rise if the estimated one-third proportion is used to consider for calculation.

2. Price changes in trade sectors and CPI

Our past research indicates that China is capable of maintaining the fixed exchange rate system, and that now its import and export volume has accounted for 60% of the GDP, the prices in the trade sectors are almost changing at the same pace with those of the means of production in the United States (Since 1977, the changes of the price indexes of means of production in China and the United States have been almost simultaneous). But the price changes in non-trade sectors are mainly determined by the pay rise. Further analysis is as follows:

In terms of global supply, the price index of means of production mainly examines the price changes of energy and basic raw materials. From the perspective of global demand, the index should examine the changes of outputs of the manufacturing industries in the major countries or the global trade volume. As to an analysis of the basic supply and demand, if the shrinkage of supply is caused by the rise of energy price, the index should indicate the relative decline of outputs or trade volume; if the output and trade volume are relatively growing, one can basically conclude that the expansion of demand is the main reason for the price changes.

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