The danger of inflation in China is overestimated.

The subject of China and inflation has been getting a great deal of attention recently. Most discussed is the question: 'With China's strong growth seemingly immune to any of the pressures that appear to be slowing growth in other parts of the world, how can China's economy escape the perils of high inflation?'

At the heart of claims that China will emerge as a dominant economic force in the world is the country's record of economic growth in recent years. China's average annual increase in GDP over the past decade is 8.3 percent. This calculation is based on International Monetary Fund (IMF) GDP reports plus their estimate that China will grow 7.5 percent in 2005.

The Chinese government does not agree with the IMF. Recently, China's Premier predicted that his country's GDP would grow 8 percent in 2005.

In 2004, China's GDP grew 9 percent following 9.1 percent growth in 2003.

The growth record and favorable predictions contribute to the international debate about China's inflation. At the moment, opinion seems to be that the gov ernment has few options to deal with thedamaging inflation that might emerge.

There are three developments that weigh against this argument. The first is that the government raised interest rates in October 2004. Inflation in January 2005 grew 1.9 percent. In the People's Bank of China's (PBC) most recent household survey, released on April 7, 2005, the PBC made a connection between the interest rate hike and consumer sentiment about prices. The bank said "the macroeconomic adjustment was taking effect and the households' satisfaction index rebounded."

Survey results showed consumer price satisfaction increasing for the first time in the last four quarters. Currently, 65.3 percent of survey respondents say that the price level is "relatively high but acceptable."

In addition, the survey revealed historic highs for income expectations.

This fuels the argument that with money flowing into household accounts, and consumers expecting more on the way inflation will increase.

The second development against dangerous inflation is how consumers are handling this money.

The PBC pointed out that survey indexes revealed the Chinese consumer's willingness to save was stronger than the willingness to spend. The implication is that the pressure to force prices to increase steeply does not exist.

For those whose savings mean investment, the housing boom in the cities is an attractive lure.

Finally, while consumer spending is important to the Chinese economy, it is not nearly as important as it is in developed economies. Of the increase in GDP in January 2005, only 48 percent was attributable to consumer spending - far less than the two-thirds rule of thumb for developed economies.

Even though per capita income in China has more than doubled in the past decade, it's still only US$5,791. Consumers just don't have that much disposable income to spend.

Footnote: China's government still retains enormous control over the economy. It exercises control by regulating industrial prices. At present, since industry means more to GDP than consumer spending, the result is even less inflationary pressure. Price controls are working (for now), and not impeding growth.

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