C.F. 326
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19.
13
There has been a suggestion that the PBOC may resort to control of the monetary base (i.e. currency in circulation) so as to contain the inflationary pressures
in China's economy.
This cannot be easily accomplished because the PBOC is often under pressure from the Ministry of Finance (MOF) to issue more Renminbi notes to finance the fiscal deficit (paragraph 11). Furthermore, even if the PBOC can control the monetary base effectively, the linkage between this and the total money supply is still uncertain. The low deposit/cash multiplier ratio of about 1:4.5 at the end of 1987 (footnote (8)) implies that any small change in this ratio, for whatever reason, could lead to substantial changes in the amount of Renminbi deposits (i.e. the more broadly defined money supply) in China's economy and hence would have significant implications for future price increases.
20.
Thus, it seems likely that, in the meantime, the Chinese authorities will have to continue to depend on administrative means, such as price checking teams and
While such rationing, to control inflation.
administrative controls can suppress inflation
artificially, they are unlikely to be effective in solving the more fundamental problem of aggregate demand being in excess of aggregate supply, nor will they help to rationalise relative prices.
21.
Apart from using administrative means to control inflation, the Chinese authorities have also sought means of accommodating inflation. One way has been to increase the amount of price subsidies to cushion the adverse effect of inflation on the Chinese consumers. In line
with the World Bank's advice, the general strategy, apparently, is to shift from producer to consumer subsidies. The latter are considered to be more easily defined, and will be less of an obstacle to improving
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