Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

China – The 800-Pound Inflation Gorilla!

Economics / Inflation Mar 05, 2011 - 10:34 AM GMT

By: Sy_Harding

Economics

Best Financial Markets Analysis ArticleWhen it comes to the growing global worries about inflation, it looks like it will be ‘As goes China so goes the world’.

China is the 2nd largest economy in the world, and rapidly gaining on the U.S. Among other statistics, it’s the world’s largest importer of copper, steel, cotton, and soybeans, and the world’s largest exporter of goods - to say nothing of being the world’s largest owner of U.S. debt.


Inflation fears have been circling the globe in recent months, with many blaming the U.S. Fed’s additional round of ‘quantitative easing’, launched last fall to give the U.S. economy another boost.

However, the fears began in China a year ago. China launched a massive $585 billion economic-stimulus plan in the depths of the financial crisis two years ago. In relation to the size of its economy at the time it was considerably larger even than the huge stimulus plan launched in the U.S. All that easy money chasing a limited supply of goods, properties, and investments surged China’s economy and stock market into bubbles.

The problems began coming home to roost last year. After surging up with the rest of the world’s stock markets in the first half of 2009, the Chinese stock market rolled over into a bear market, in which it lost 33% of its value in its plunge to its low last July.

The easy money remained in the system, China’s economy continued to boom, and speculation shifted from its stock market to its real estate sector (sound familiar?).

Concern about its overheated economy and soaring real estate prices finally prompted China to begin reversing its easy money policies a year ago. It began by raising the capital reserves its banks had to hold, in effect removing money from the financial system, and increasing the size of down-payments required to purchase real estate. When those efforts had no effect on the soaring economy, real estate speculation, or inflationary pressures, the Chinese central bank began raising interest rates. And as the problems persisted, it has become increasingly aggressive, with multiple hikes in interest rates and increases in bank reserve requirements, the most recent taking place last week.

The global spike-up in food and oil prices has not helped for sure. But China’s inflation problems are not confined to real estate and commodity prices, either.

China is in the stage of its economic development where it needs, and wants, to increase domestic demand for its products, and move away from dependence on exports. To achieve that goal, wages and salaries must rise to move more of the population into the middle class.

Already the minimum wage in China’s major cities and ports has been raised an average of ten percent. Meanwhile, China’s National People’s Congress is meeting this weekend to establish China’s next ‘Five-Year Plan’. An important feature of the plan is reportedly endorsement of higher wages and salaries.

Wage-price inflation is the worst kind of inflation because it feeds on itself. As wages rise, companies have to increase the prices of their products. As prices rise further, workers demand still higher wages, and a difficult to stop inflationary spiral can get underway, as took place globally in the 1970’s.

With China being the world’s largest exporter, a potential wage-price spiral has serious implications for the rest of the world.

For example, in November mainland China’s inflation problems spilled over into Hong Kong, where the Consumer Price Index rose 0.5%, an annualized rate of 6%, the fastest monthly increase since mid-2008.

Last month Li & Fung Ltd., headquartered in Hong Kong, the largest supplier of products to Wal-Mart, predicted that the price of Chinese and Hong Kong exports will increase as much as 15% this year. The second-largest retailer in Britain, Next Plc, said it expects higher labor costs in China will result in an 8% increase in its prices in the first half of this year.

Rising inflation has already become a significant problem in important global economies outside of China, including Hong Kong, India, Brazil, and emerging markets like South Korea, Indonesia, and Singapore. And their stock markets topped out in November and are down 10% to 17%, on concerns about the rising interest rates and tighter monetary policies that have already begun, required to combat the inflationary pressures.

Similar inflationary pressures have not yet arrived in the U.S. and Europe, and the consensus opinion has therefore been that interest rates in the U.S. and Europe can remain at record lows at least until the end of this year, if not well into 2012.

But the chief of the European Central Bank shocked analysts on Thursday by saying that inflation pressures have indeed become worrisome, and the ECB could raise interest rates across the 17-nation Eurozone as soon as its next meeting in April.

That does leave U.S. Fed Chairman Bernanke as about the only global central banker who does not acknowledge that what began a year ago in China is circling the globe, with the pressure pushing it from China increasing not subsiding.

That complacency is not likely to last much longer - or it will be too late.

Meanwhile, another reminder: Gold is the historical hedge against inflation.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2011 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules