Will China Have Serious Inflation?

There has been much concern about inflation in China recently. The People’s Bank in the last few months has raised the reserve requirement several times to control the money supply to slow down inflation. In 1985 when I was organizing a summer workshop on macroeconomics in cooperation with the Ministry of Education, Premier Zhao Ziyang asked me to forecast inflation in 1985-1986 because in 1984 the supply of money in the form of currency in circulation increased by 50 percent. I estimated an equation using data from 1952 to 1984 to explain inflation and used the equation to project forward to forecast an inflation rate for 1985 of no more than 9 percent which turned out to be correct. This equation was published in Chow (1987, equation 18) and updated using data up to 2004 in Chow (2007, pp. 34-5).