Last month’s inflation data revealed that the consumer price index (CPI) rose by 4.4 per cent year-on-year, compared with 3.6 per cent in September and the consensus forecast of 4.0 per cent. Consumer prices are beginning to get out of control.

A country that is developing so rapidly and undergoing such huge structural changes might be expected to run a somewhat higher rate of inflation than more mature, slower growing economies. But, Yiping Huang points out that the recent increase in the inflation rate is beginning to alarm not only the responsible policy authorities but also the political leadership. Month-by-month, inflation accelerated to 0.7 per cent in October from 0.6 per cent in August and September. This implies an annual inflation rate already running at above 8 per cent, way above the official annual target of 3 per cent. This is an inflation outlook that is heading into political danger territory. Given tighter food market conditions, accelerating wage growth and very loose liquidity conditions, the October increases are unlikely to be the end of the current inflation cycle despite the recent lift in interest rates.

In this week’s lead essay, Huang reports that the Chinese authorities are now focused on getting prices under control. Last Sunday the State Council issued a new policy document (the Sixteen Articles) aimed at stabilising prices. Reading the document, Huang says, is like entering a time machine, and being transported right back to the 1980s. The policy measures promulgated in the Sixteen Articles are not only micro in nature, but also central planning in style. They call for better management of farms for the production of winter grain and oils. They require the railway department to arrange cotton transportation properly in Xinjiang. They order the state power grid not to cut off power supply to fertilizer factories and to close down illegally built corn processing factories. This is really going back in time. If the policy document were issued in the 1980s, then there would probably have been one article specifically capping the prices by the government. At that time, the prices of many products, including food products, were directly controlled by the state. But even with those direct controls, there was no way even the government could contain inflationary pressures. The CPI rose above 10 per cent in both 1985 and 1988.

Monetary policy — the bulwark of inflation control instruments in market economies — is not mentioned, even once. And, of course, the role of exchange rate appreciation in alleviating inflationary pressures is another thing altogether. So much more worrying than the price break-out itself, is the way in which policies are being framed to deal with it — retrogression to the failures of the command economy away from proper reliance on market instruments.

In the 1980s, the rest of East Asia didn’t have to worry too much about the direct effects of policy failure in China. The scale of China’s integration into the world, and especially the regional economy, means that this is no longer the case. Failure of policy in China to ameliorate overheating through the use of market-oriented policy instruments is likely to lead to an old-style economic crunch in China, with heavily distortionary effects in particular markets and sharp external shocks for China’s partners and suppliers like Australia.

Socialisation of the market in China, in the non-pejorative sense of that phrase, still has a long way to go. There appear to be still powerful atavistic policy instincts within the policy leadership. While it won’t solve the problem alone, it is certainly high time to elevate the international dialogue with Chinese leaders on the international repercussions of these macroeconomic management strategies.