China Inflation: Canary In The Coal Mine

Inflation in China, largely controlled during the global recession, roared back in April. The increase in prices comes after news that the nation’s manufacturing index has risen since the beginning of the year. The country’s appetite for coal and oil imports have reached record levels as the People’s Republic fuels its factory and infrastructure expansion.

The National Bureau of Statistics In China said that consumer prices jumped 2.8%in April from a year earlier. This was the most rapid pace in 18 months. Property prices increased a breathtaking 12.8%. The increase in mainland property prices is beginning to look like those in America in 2006 and may lead to the same terrible trouble as the ability to leverage to buy homes eventually falters. The increases were probably caused by a balloon in bank lending which has pushed huge amounts of capital into the market and increased consumers’ ability to spend.

One of the issues that China faces is that consumer credit is driving up property prices for reasons other than the liquidity caused by the nation’s $585 billion stimulus package and bank policies. The number of people in China’s middle class is rising rapidly with manufacturing demand and the need for more factory workers. This has caused demand for goods and services, naturally leading them to rise in price.

Inflation is only magnified by the increased cost of commodities including crude, which may be outstripping global supply.

The most critical problem China faces is not inflation per se; it is whether the cost of this inflation can be passed on to its trade partners in the form of more expensive goods. US and EU nations may not be willing to accept higher priced imports just as their economies are recovering from the recession. That, in turn, could cause China to hold its yuan peg to keep the prices of its exports artificially low. The higher cost of manufacturing goods will also make it harder for Chinese companies to attempt to “dump” low-priced products on to global market to reduce supply.

China’s immediate problem may be inflation, but its longer term trouble is how to pass those costs to trading partners.

Douglas A. McIntyre