By Yi Xianrong (China Daily)
Updated: 2007-08-10 13:22

Moreover, profound changes have taken place in the country's economic set-up and climate over the last three decades. In this context, the CPI draw-up trails new developments - and its accuracy is questionable.

The current CPI calculation is based on the calculation system of the national economy in 1993. This explains why spending on education, healthcare, housing, communications and transportation, which constitute very large portions of Chinese consumers' expenses, fail to be fully reflected in CPI.

A CPI that is unable to accurately mirror people's consumption, therefore, offers an inaccurate interpretation of the country's economic life and is also prone to leading the government, enterprises and ordinary households to erroneous decisions.

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This writer believes many domestic economic problems have their roots in the low-interest policy. This finds expression in a number of phenomena.

First, the banks' interest rate is lower than that of the non-governmental credit market.

Second, the interest-rate level of the country is very much disengaged from the nominal GDP growth.

Third, the United States and China both started raising interest rates in 2004, with the Fed having increased the interest rate 17 times so far, but the People's Bank of China having raised the rate merely five and a half times. This should be considered against the fact that the Chinese economy is growing several times faster than the US economy.

Fourth, the domestic banks' interest-rate level is widely dislocated from the high investment-return rate. Chinese enterprises' profits rate, for example, currently stands as high as 20 percent, thanks to the booming Chinese economy, and the real estate sector sees particularly higher profits rate.

In view of all this, a conclusion can be drawn: It is simply impossible to have various kinds of distorted economic behaviors corrected if the current low-interest policy remains unchanged.

The modern-day central-bank working mechanism emphasizes foresightedness, rather than merely working out monetary policies according to the latest economic data. And the data for reference should not be exclusively confined to CPI and they should also include fluctuations of assets' prices. Moreover, some economic data is disconnected from the economic reality.

In short, it is high time that the nation's CPI system be restructured. It can be said that the end of the old CPI system means the end of high growth speed and low inflation.

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