Introduction

For much of its existence, the People's Republic of China was essentially free of open inflation. Rigid controls kept official prices of many goods virtually unchanged for decades before economic reforms began in 1978. Limited inflationary pressures emerged after 2002 in the face of rising capital inflows and growing pressure for renminbi appreciation, as discussed in Chapter 1. However, Chinese authorities previously had to confront much more severe upward spikes in inflation in both 1988–1989 and 1993–1995. Inflation peaked at over 24% in 1994 before falling back to single digits in 1996 and less than zero in 1998. By 1998, the government's concern clearly shifted to the slowing growth rate of the economy and the weaknesses in the nation's banking system. The increased government expenditures aimed at boosting growth and recapitalizing the banks helped end China's deflation episode but also set the stage for new inflation worries in the early twenty-first century.