Based on November numbers provided by the Chinese government, annual inflation is running at 6.9% and the cost of food is rising at 18%. The banking system in the big country is increasing the percentage of capital that has to be kept in reserve, but so much money has already been loaned into the system that it may not matter.
And, that is the heart of the problem. Easy credit has allowed Chinese businesses and consumers to buy real estate and stocks, in addition to Western-style amenities like cars and consumer electronics. While the value of the goods will not rise, real estate and stock values could continue to increase for months.
There are also rumors that the lending business in China is not restricted to banks and that "underground" loan services are available almost everywhere–at high interest rates.
The Chinese central government has released a beast which it can no longer control. Over the last two years, the value of the Hang Seng Index is up 100% and the Shanghai Composite has doubled that.
Hong Kong REITs have returned 18% this year, and the underlying value of real estate in China may be going up much faster than that.
China’s problem now is a simple one. In an attempt to keep GDP moving up, the government has made sure that almost every business and people in the large cities had access to capital. Now, the capital has moved out of currency and into stocks and real estate. Those are "instruments" over which China has very little control.
Douglas A. McIntyre
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