| Inflationary Pressure From Leadership Transition
Maintaining stability in price levels has always been a major task for macroeconomic controls. In the wake of the U.S. financial crisis, economic stimulus coupled with quantitative easing policies caused China's overall price levels to run high. The overlap of economic and political cycles, in combination with the loosening of global monetary policies, means the situation in China will not change this year. Rising prices will undoubtedly weaken happiness and erode public welfare.
Global liquidity will continue to remain loose, due to an easy monetary stance and prudent fiscal policy pursued by countries like the United States and Japan. Last year's Central Economic Work Conference—an annual meeting that decides economic policy for the year ahead—also forecasted that pressures from potential inflation and asset bubbles would continue to mount.
In the context of globalization, China adopts a prudent monetary policy and loose fiscal policy, but an easy monetary environment in other countries will bring imported inflationary pressure on China. Meanwhile, the country will also be confronted with rising labor costs, which will impact overall price levels.
While keeping a watchful eye on imported and cost-driven inflationary pressures, we should pay more attention to political factors. Changes in both central and local leadership will be completed at the 2013 sessions of the National People's Congress and the Chinese People's Political Consultative Conference. As a leading indicator of competition between government officials, GDP growth is high on the agenda.
It is widely expected that China's economic growth rate will rise above 8 percent this year. According to the government reports of the total 31 provincial-level governments, 24 targeted GDP growth at more than 10 percent in 2013.
Despite booming enthusiasm, options are limited. Although there is a chance for further loosening of monetary policy, it remains unfeasible given already sufficient liquidity.
Some predict that the budget deficit in 2013 would exceed 1 trillion yuan ($160.6 billion), a record high since 2009. Media reports suggest the 2013 budget draft by the Ministry of Finance allows central and local governments to run deficits of 1.2 trillion yuan ($192.7 billion). For local governments, launching new projects and attracting investment would still play a key role in promoting local economic development.
Whether the government prints money or expands deficits, investment-driven economic growth of more than 8 percent can only be achieved with sufficient funds. Monetary measures would immediately lead to price rises while fiscal ones can postpone any negative result. However, both will raise price levels.
As all the money governments spend comes from the people, it's the people who must eventually pay for price rises. History shows that a transition of leadership is always accompanied by mounting inflationary pressures.
Increased price levels derived from political factors are totally different from those caused by rising wages and quantitative easing. They are a result of political and economic interaction, which cannot be explained by economic principles alone. To achieve the goal of "keeping overall price levels stable," more efforts should be made to eliminate effects brought on by political factors.
This is an edited excerpt of an article by Huang Weiting, an associate research fellow from the Academy of Macroeconomic Research under the National Development and Reform Commission, published in Securities Times | 
