This article first presents an analysis of the two most important macro variables: inflation and growth. In respect to inflation that faces a daunting landscape at the present time, China can still hold the inflation rate at an appropriate level in 2008. In consideration to a world economic slowdown and primary goods price trends as well as domestic price hikes and production overcapacity, inflation should be able to be kept in check in 2008. In regards to growth, this article employs the Phillips curve equation to arrive at a potential growth rate of 9.4% for China in 2008. Over the next couple of decades, however, the potential growth rate is projected to decline. Subsequently, this article discusses the challenges facing the tightening monetary policy: the trade-off between growth and inflation, the quagmire of liquidity control, the different interest rate movement episodes of China and the Unites States at different stages of economic cycles, and the temporary expediency nature of taming inflation through currency appreciation. Nevertheless, monetary policy still has a positive role to play and China should remain steadfast in pursuing monetary austerity policies. Last but not least, the article presents an outlook for the future.
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