“Someone please cool this economy down now,” says a Standard Chartered note. Three interest-rate rises and several increases in banks’ reserve requirements – which reduce the amount of money banks can lend – have done little to temper fears that the Chinese economy is overheating. GDP rose by 9.7% year-on-year in the first quarter, only a shade below the previous quarter’s 9.8%. Consumer price inflation reached 5.4% in March, a near-three-year high and up from 4.9% in February.
“Inflation is becoming a serious problem,” says Economist.com. Food prices are increasing by an annual 11.7% – “an unsettling development”, as households spend a third of their budget on food. Moreover, two years of unprecedented bank lending have greatly boosted the money supply. The lending clampdown has gained little traction. It seems that an “unofficial financial realm” has “sprung up outside China’s heavily regulated banking system”, says the FT’s Henny Sender.
The upshot is that inflation has become “endemic”, says Ian Campbell on Breakingviews. In one province, the price of haircuts has reportedly gone up by up to 50%. Due to a dwindling labour supply, wages have risen steeply. Six provinces have raised their minimum wage by 50%. The worry now is that inflation will take off and lead to social unrest, damaging the economy. If the central bank remains behind the curve it will eventually have to impose a “growth-gutting tightening”, says The Economist.
High inflation or slower growth in the world’s second-largest economy will have an impact beyond local markets. Rising prices and wages will boost export prices, adding to inflationary pressure in the West. That may rattle stockmarkets, because it could mean interest rates rising earlier than expected. China is likely to allow its currency, the yuan, to rise in order to temper inflation. Exports will then become even pricier, says Campbell.
Meanwhile, a slowdown in Chinese growth threatens profits that companies listed in the West “have been counting on”, says David Barboza in The New York Times. That’s not to mention a correction in commodities prices, as China is a key source of demand. China’s overheating is just one more potential headache for global investors.