Editor’s note: this article was translated and edited from Wenxuecity.com and looks at an article published by Yale finance professor Chen Zhiwu. The article discusses the effect China’s currency policies – in particular China’s artificial inflation of the RMB – are having on ordinary people. Xia Yeliang, a Peking University professor, consolidates these points and links them up with a whole range of socio-economical issues that could cause social unrest in the near future.  

Recently, Chen Zhiwu, Professor of Finance at the Yale School of Management published an article entitled “Getting Poorer Over Time is Not Just an Illusion”, which pointed out that the Chinese government has been concealing inflation data. This has subsequently allowed the authorities to control the supply of money, which has in turn caused the money of ordinary people to fall into the hands of the government, leading many Chinese citizens to become “poorer and poorer over time.” The article was published on March 13 and questions the extent of China’s inflation and whether or not current currency policies are really working. 

According to official statistics, from 2000 to 2012, China’s consumer price index (CPI) increased by around 31 percent, while America’s increased by 36 percent. In lieu of these statistics, the purchasing power of the US Dollar should have decreased dramatically.  However, the average American has not perceived a significant decline in purchasing power over the last 12 years with the Dollar.

In contrast, when looking at the Yuan, 100 RMB is currently able to purchase much less than it could have twelve years ago, with the Chinese public feeling the effects of inflation far more than Americans. What’s more, the inflation rate in China is actually much higher than the statistics released by Chinese officials.

CPI data kept “artificially low”

In his article, Chen Zhiwu points out that Chinese government reports released this year state that in the last five years, China has managed to keep its inflation rates low compared to other emerging economies.

However he believes that official CPI data is questionable. According to Chen, it simply cannot reflect price changes experienced by ordinary people, nor the reality of the situation despite it already being manipulated to appear low.

Chen also states that this apparent “low” inflation is quite convenient for officials, in that it allows them to control the supply of money and “stimulate the surface of prosperity.” However these policies result in the transfer of wealth from the hands of the ordinary folk to the pockets of the government.

Various reports state that by 2020, the average income of rural Chinese will be double of what it was in 2010; however in light of the artificially low CPI data, much more money will have to be printed for this income increase to be achieved. Moreover, the phenomenon of “getting poorer and poorer over time” will still be felt by many ordinary citizens.

Signs that the Yuan is in fact shrinking

The article received a lot of attention after it was published and reposted on Chinese financial websites. One netizen stated, “The devaluation of the RMB needs to be seriously considered by the government. It seems that the rich are in fact not rich; this is a truly a huge societal problem; reforms are imperative.” Another netizen added, “There are very few economists in China like Chen Zhiwu who have pointed out such problems. It is the common folk who are suffering under this false data.”

Xia Yeliang, Professor of Economics at Peking University raised a series of similar points several years ago and was recently interviewed by German news body Deutsche Welle. Xia said that from an economist’s angle, China’s yearly GDP increase and continuous high growth should have seen income and social welfare improvements in the past few years, but ordinary Chinese citizens have yet to enjoy these benefits. In fact their decreasing quality of life simply reinforces the points made by outspoken economists such as Chen.        

According to Xia, “The official statistics depict inflation rates of between 2-3 percent. However, the reality for many normal people is much more serious, with the real rates probably being greater than 10 percent. In fact, the circulation of the Chinese currency in the last few years and the broad money supply were actually about five or six times more than the actual amount, indicating that the currency is shrinking.

Everyone is curious about the fact that despite the value of the USD and RMB continuously rising, the RMB is still being devalued at home. This means that money spent by consumers is being transferred overseas, leaving Chinese citizens unable to experience the benefits of their country’s economic growth. Xia went on to say, “If the effect on the ordinary people isn’t too obvious, the government will increase the circulation of the RMB by ten times that of the actual amount there is. There are many ways they can do this, though it really equates to robbery.”

Instability to “rear its head more often”

Xia believes that from ancient times until the present day, ordinary Chinese folk only start to protest after experiencing a feasible amount of economic pressure, with an inevitable outbreak of social unrest arriving once a certain limit is passed.

According to Xia, “The feelings of inequality and injustice will deepen, and with other issues including corruption and pollution, the tipping point will get closer and closer; the elements of instability in society will rear their heads more often…In principal we can solve these issues through reform and institutional change. We can strongly promote the market to eliminate these issues; however the current situation is the reverse of this, with officials maintaining the current system on one hand, and most ordinary people not willing to increase their burdens on the other.”

“The Xi Jinping/Li Keqiang era has already begun,” Xia notes. During his inauguration, Xi mentioned a concept of the “Chinese Dream” which has become a hot media topic. Xia believes that if this so-called “Chinese Dream” doesn’t consider the peace and prosperity of ordinary people, then there is no way it can come to fruition: “If the basic national interests of China can’t ensure the improvement of quality of life for ordinary people, then aren’t we just strong in appearance but weak in reality?”

Source: Wenxuecity.com
 

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Keywords: Chen Zhiwu China’s artificial Inflation