The Relationship Between International Grain Prices And China’s Domestic Inflation

The surge of international grain prices in recent years has been a conspicuous phenomenon attracting attentions from economists and common people. The thesis focuses on the relationship between international grain prices and China’s domestic inflation. The author selects this topic for the following three reasons. Firstly, the prices of main kinds of grains have experienced a new round of significant increase since2007, which has turned into an important factor fueling instability in some countries. And according to the projections made by IMF on January2013, the prices of main kinds of grains will not soar quickly but still remain at high level in the next two years. Secondly, China is a major grain importer in the international grain market and still needs to import a large number of grains every year to meet the demand of its large population and economic development. The growth rate of China’s population has declined significantly due to the implementation of one-child policy. But the absolute number of annual population growth is still very high. In1991, the total population of China was1.16billion. In2011, the number reached1.35billion, increasing by more than16percent in twenty years. Thirdly, China is still facing the pressure of increasing inflation, especially the food-price inflation. Although Chinese government has taken systematic measures to control domestic inflation and gotten some positive effects, some factors fueling the rapid increases in inflation have still not been eliminated.There are some discrepancies among different definitions of grains. In the context of China, the main kinds of grains imported are wheat, corn, rice and soybeans. So the thesis, especially the empirical test section, will focus only on the four kinds of grains.The thesis studies the relationship between international grain prices and China’s domestic price level through both theoretical and econometric analysis. In the chapter of theoretical analysis, the author will analyze the pass-through mechanism of international grain price inflation. In the mechanism, domestic grain price is the intermediary connecting international grain prices and one country’s general price level. In other words, international grain prices exert direct influences on China’s domestic grain prices, thus pushing up China’s general price level. In the chapter of theoretical analysis, the thesis will measure the relationship between international grain prices and the price level in China through two steps. The first step is to establish a VAR model to analyze the dynamic relationship between international and domestic grain prices. Granger Causality Test and Co-integration Test will also be applied to the study. The second step is to compare the changes of domestic grain prices to the fluctuations domestic price level. The empirical test covers the time period from1979to2010.The main conclusions of the thesis are as follows.(1) International grain price is the Granger Cause of China’s domestic price level and the former can exert some influences on the later.(2) Could the influences of the rise of international grain prices be significant and continue for several years if without the opposite impulses of other factors.(3) Besides international grain prices, some other factors—the monetary policy of government, domestic output of grains and agricultural costs, for instance—can also push up or depress domestic grain prices, thus affecting China’s CPI.(4) Another finding worthy of attention is that neither China’s domestic grain prices nor China’s demand for foreign grains can strongly affect grain prices in international market.At the last part of the thesis, the author lists some policy recommendations, including domestic grain production, adjusting the monetary policy to domestic and international situation and strengthening China’s bargaining power in international grain market.