The most immediate challenge appears to be inflation, which some analysts say may be even more serious than the new figures suggest. Housing prices have skyrocketed. And prices for milk, vegetables and other foods have soared this year.
“The money supply is too large,” said Andy Xie, an economist based in Shanghai who formerly worked at Morgan Stanley. “They increased the money supply to stimulate the economy. Now land prices have jumped 20 times in some places, 100 times in others. Inflation is broad-based. Go into a supermarket. Milk is more expensive in China than it is in the U.S.”
In Shanghai, where the average monthly wage is about $350, a gallon of milk now costs about $5.50.
Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year.
That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation.
Beijing is now under pressure to mop up excess liquidity after state banks went on a lending binge during the stimulus program that got under way in early 2009. Analysts say a large portion of that lending was diverted to speculate in the property market.
In addition to restricting lending at the big state banks, Beijing recently moved to close hundreds of underground banks and attempted to restrain local governments from borrowing to build huge infrastructure projects, some of which may be wasteful, according to analysts.
Some economists say the real solution is for Beijing to privatize more industries and let the market play a bigger role. After the financial crisis hit, the state assumed more control over the economy.
Now, state banks and big state-owned companies are reluctant to surrender control over industries where they have monopoly power, analysts say.
“Inflation is not the most serious problem,” says Xu Xiaonian, a professor of economics at the China Europe International Business School in Shanghai. “The most fundamental problem we have to resolve is structural. We need more opening up and reform policies. Look at the state monopolies in education, health care, telecom and entertainment. We need to break those up. We need to create more jobs and make the economy more innovative.”
Zhiwu Chen, a professor of finance at Yale, agrees.
“The state economy and the local governments will be where the future problems occur,” Professor Chen said in an e-mail response to questions on Sunday. “They will be the sources of real troubles for the banks and the financial system.”