China’s inflation figures have delivered another “ugly surprise”, says Lex in the FT. Consumer price inflation jumped to an annual rate of 5.1% in November, a 28-month high, from 4.4% in October. Producers are passing on higher raw-material costs and rising domestic wages.
China’s strong recent export performance is due largely to higher prices, says Wei Gu on Breakingviews. In the first 11 months of 2010, the value of most exports rose faster than volumes. “Chinese exports have been one of the main global deflationary forces of the past decade. That’s changing.” Meanwhile, last month saw the biggest jump in imports in ten years. And the money supply is up by an annual 20%. These are further signs of overheating.
Mindful of how runaway inflation underpinned the student protests of 1989, the government has pledged to “prioritise” price stability. But they seem to be falling behind the curve, says Lex. They have increased reserve requirements and reduced the amount banks can lend six times this year. But this supposed tightening has had no impact on price rises. No wonder. Banks “are still awash with cash” following the state-driven lending spree last year.
The main lending rate is still at 5.56%. It was 1% higher when inflation was last this strong in the 2007 boom. Tinkering with reserve requirements, rather than using tougher measures such as higher interest rates, looks “increasingly untenable”, given how fast price pressures are building, says Brian Jackson of RBC.
The problem is that “China is trying…to manage the deflation” of a credit bubble, says Timothy Ash of Royal Bank of Scotland. Coming down too hard on inflation could send the economy into a tailspin. But the worse inflation gets, the tougher the tightening necessary to drive it out. Walking the tightrope between inflation and growth won’t be easy.
The bubble may already be popping, given the recent slide in the Organisation for Economic Cooperation and Development’s leading indicator for China. Fitch Ratings estimates a fall in China’s growth rate to 5% would be enough to wipe 20% off commodity prices and 25% off Asian equity markets. A hard landing in China, says Daniel Arbess of Perella Weinberg Partners, “is arguably the greatest risk to the global economy”.