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ECON501HW1 - ECON501 Professor Reagan Homework#1 The first...

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ECON501 Professor Reagan Homework #1 The first three questions relate to the following article. Piggy bank raid: Beijing acts to quell inflation By Richard McGregor Published: September 25 2007 19:55 | Last updated: September 25 2007 19:55 In any other country, a shortage of pigs might be brushed off as a temporary phenomenon, cured by another turn in the perennial “hog cycle” as rising prices prompt higher meat production. But in China, where pork is the staple meat and food counts for a large part of the household budget, the shortage – and its feared spillover to other parts of the economy – is being treated as something approaching a national emergency. The spectre of inflation fomenting broader discontent – as it did two decades ago, culminating in the Tiananmen Square protests of 1989 – taps into the deepest existential fears of Chinese rulers about mass disorder and regime survival. In recent weeks, protests by students angry at higher prices and smaller food servings in their canteens have been reported in Anhui and Guangdong provinces. Even in affluent urban centres, including Beijing and Shanghai, the food price rises are causing resentment. Inflation hit 6.5 per cent in August, the highest rate in 11 years, largely because of a 49 per cent year-on-year surge in meat and poultry prices (see chart). The fact that non-food price gains have remained low, at less than 1 per cent, has not calmed the nerves of senior policymakers. “We have entered a very delicate stage of our development,” says a senior economist and government adviser, asking not to be named. “For a long time, I was very optimistic about China’s growth, but now I am quite worried. Real inflation is much higher. No one believes the government’s figures.” Inflation has lowered the attractiveness of bank savings, which pay only 3.87 per cent interest on a one-year deposit account. If negative real interest rates persist, policymakers fear depositors could flee the banks and pour more of their money into the already frothy stock and property markets. “Inflation and the asset bubbles are now supporting each other. This is very dangerous,” says the economist. Two high-profile events on Beijing’s calendar have added to the pressure on the government. The five-yearly Communist party congress in mid-October will pick the country’s leadership team until 2012 and perhaps anoint a new generation of leaders to
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take over after that. August 2008, meanwhile, brings the Beijing Olympics, an event on which the government is betting China’s reputation. In the short term, the government has also been rushing out a series of measures, in recent days freezing state-controlled prices and releasing meat from a “strategic pork reserve” as well as offering farmers incentives to raise more pigs and get them to market. Officials are anticipating a surge in demand during week-long National Day holidays that start on October 1 and are a time of family celebrations and banquets.
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