The single most likely thing to bring down the Chinese economy is inflation. Inflated food prices. Inflated stock prices. Inflated real estate prices.
During October, government data released Wednesday showed retail sales rose 18.1% from a year earlier, according to MarketWatch. The consumer price index rose almost 7% last month.
The financial news site also reports "excluding food, inflation rose 1.1% in October, suggesting Chinese companies are not passing on higher raw material costs to consumers, and are instead accepting lower profits in order to protect their market positions."
The Chinese government may raise interest rates to slow the economy, but that is not going to work if the government is also willing to build a wall that prevents prices from being passed on to consumers. The communist party fuels inflation with subsidies while it raises interest rates modestly to keep spending down. One thing cancels out the other, or, worse, the interest rate increases do not help put on the brakes at all.
China’s central planning mechanism has become its own worst enemy. It is willing to actually cause inflation by creating an artificial economy. And, that has to fall apart at some point. Even the government does not have the capital to underwrite the consumer forever.
Douglas A. McIntyre
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