China Inflation May Be A US Opportunity

China continues to thrash the US in economic growth. Analysts expect GDP growth in the People’s Republic to be above 10% this year while the improvement in the US may be no better than 3%.

The HSBC purchasing manager index for China rose to 56.1 in December, up from 55.7 in November. Reuters reports that the figure is the best since April 2004.

A hot economy often come with the specter of inflation. Chinese manufacturing companies are already admitting that their rising costs are forcing increases in the prices that they charge their customers.

China is faced with three tremendous forces that are likely to make hyper-inflation more likely as the year wears on. The first is the impressive availability of capital. China’s $585 billion stimulus package has poured money into the market causing bubbles in real estate and equities. The capital has also driven consumer demand for goods and services. That demand is likely to push prices even higher.

China has also taken a large part of its impoverished rural population and moved them to cities to work in factories. That has created a middle class in China that did not years ago. The needs of this middle class are pushing up the costs of commodities including fossil fuels and agriculture products.

China’s need to import strategic products like oil are also likely to raise prices of that critical commodity, pushing up prices of chemicals, diesel, and gas.

Inflation in China means that it will lose some of its “low-cost” producer status which has made it the manufacturer to the world. Chinese companies will have to pass on a large part of their burgeoning costs to customers in the West, large companies such as Wal-Mart (NYSE:WMT) and including operations like Dell (NASDAQ:DELL).

The dream of a renaissance in manufacturing in America may come true. All that may be needed is enough inflation in China to make its ability keep its cost of factory-made products down impossible

Douglas A. McIntyre