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  • China Pays for Growth with Rising Inflation

    Posted on May 19th, 2011 Profit Confidential No comments

    By George Leong, B.Comm.

    China is the second-largest economy in the world and is continuing to roll along at a nice pace. And while the growth is impressive, my economic analysis is simple: the superlative GDP growth is great, but the problem is the associated inflation that often surfaces as consumers spend more, and we know that spending is spreading like wildfire in China.China is the second-largest economy in the world and is continuing to roll along at a nice pace. The International Monetary Fund (IMF) recently downgraded U.S. GDP growth to 2.3% this year from the previous 2.9% but concurrently raised China’s GDP growth to 9.9% this year—up from the previous 9.7%. This is why you need money in China.

    The results reflect the significant growth difference between China and the U.S. and Europe. China is continuing to roll along at high speeds, but it must be controlled.

    And while the growth is impressive, my economic analysis is simple: the superlative GDP growth is great, but the problem is the associated inflation that often surfaces as consumers spend more, and we know that spending is spreading like wildfire in China.

    In April, the country’s consumer price index (CPI) was 5.3%—slightly lower than its March 32-month high of 5.4%, but still high by any standard. The CPI acts as a good way to gauge inflation. The average inflation rate in China from 1994 to 2010 was 4.3%, so there needs to be some work done here to relieve the inflationary pressures.

    The reality is that prices continue to rise as consumers continue to spend, so we expect more tightening via either higher interest rates or higher bank-reserve requirements in China (or both).

    Moreover a report that was just released indicates that real-estate values in China continue to rise in many of the tier-one and tier-two cities. This will force the government to look at further tightening, as some of the rise is due to speculative buying.

    Interest rates continue to ratchet higher, and I expect the upward move to continue. The Chinese government has placed a cap on certain food products and subsidizing some of the poorer rural workers.

    Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to keep its course and tackle inflation, since rising prices will hurt the majority of the 1.3 billion people living in China who are just trying to get by on a daily basis.

    Chinese inflation is a real potential threat to growth and stability—not only in China, but globally with its trading partners. We could see higher-cost Chinese-made goods as prices rise, and this will drive up the prices of Chinese-made goods that are sold in the U.S.

    Overall, China is on the right path toward developing into a rising world economic power, as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services and technology. The reality is that if it is saleable and in demand, then you know that China will likely have a consumer market for it. China knows that, and so do many of the top multinational companies, including many in the U.S.

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