SCMP Issues and Implications: July 22, 2008

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The Politburo, China's top decision-making body, will convene this week to discuss 3 pressing problems: slowing growth, rising inflation & a decrease in exports amid the global economic slowdown. The following senior government officials will take part in this meeting: President Hu Jintao, Premier Wen Jiabao, Vice-Presidnet Xi Jinping, Executive Vice-Premier Li Keqiang and Vice-Premier Wang Qishan. According to a government economist, "The meeting was called after leaders read primary data recently and their missions to related regions were urgently planned to prepare them with first-hand information on the latest developments in the economic powerhouses". On top of that, consumer prices skyrocketed 6.1% in June, the biggest monthly increase in 11 years.

Implications/Analysis/Comments/Remarks: This is the classic definition of stagflation (i.e. a slow economy and rising prices).

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According to various experts, the mainland can tackle inflation better than Hong Kong by handing out food subsidies and imposing price controls on food and other necessities. According to Terence Chong, associate professor of economics at CUHK, "Hong Kong has no such policies to cool inflation. If the rate of inflation continues to spiral upwards in Hong Kong and downwards on the mainland, Hong Kong's inflation (rate) will exceed the mainland's (inflation rate) in 2 months". According to a governmnet spokesman, "The inflation outlook for the rest of the year remains uncertain due to volatile international food and energy prices".

Implications/Analysis/Comments/Remarks: If Hong Kong really does lose a lot to the mainland, this will put a major dent in HOng Kong's reputation as Asia's world financial center.