Inflation in China Escalates - Miracle Expansion or Bubble to Burst?

The New York Times reports Inflation in China Is Rising at a Fast Pace

From street markets to corporate offices, consumers and executives alike in China are trying to cope with rising prices. The National Bureau of Statistics announced on Saturday that consumer prices in China were 3.5 percent higher compared with a year earlier, the largest increase in nearly two years.

To make matters worse, inflation over the short term also seems to be accelerating. A seasonally adjusted comparison of August prices to July prices showed that inflation was running at an annualized pace closer to 4.8 percent.

Prices are rising in China for reasons that many Americans or Europeans might envy. The economy is growing, stores are full and banks are lending lots of money, according to other statistics released by the government on Saturday.

Compared with August of last year, industrial production rose 13.9 percent last month, retail sales increased 18.4 percent, bank lending climbed 18.6 percent and fixed-asset investment surged 24 percent.

All four categories rose slightly more than economists had expected, in the latest sign of the Chinese economy’s strength even as recoveries seem to be flagging elsewhere.

But salaries for recent college graduates, at $300 to $500 a month in coastal areas, have actually declined in the last few years, even before adjusting for inflation. A rapid expansion of universities over the last decade has resulted in more young men and women with undergraduate degrees than companies are ready to hire, except at lower pay.

And as in many countries, retirees are among the most vulnerable to inflation. Ms. Lam said her own mother lived on a pension of just $150 a month.

Rising wages are putting pressure on companies to increase their prices. Mr. Dong, the sales manager at the Ningbo Deye Domestic Electrical Appliance Technology Company, said the company had to raise wages by 10 percent a year, while raw material costs were also climbing.

“It is impossible to transfer our cost increases entirely to our customers, because if we do so, they will all run away,” he said. “We are currently doing a study of our assembly line work processes to see where we can achieve greater efficiency.”

But as the powerful growth in fixed-asset investment last month showed, Chinese companies are still responding to rising prices by building more factories, office buildings and other equipment, instead of cutting back.

Chinese officials have said for many years that they regard 5 percent inflation as unacceptable, and they have shown a willingness to clamp down on bank lending and investment whenever annual increases come close to that level. They have taken some of these steps in recent months, but more recently eased back on lending controls as some Chinese economists suggested that domestic demand might not be as strong as the August data showed.

Economic Stress and Property Bubbles, or Miraculous Expansion?

Let's not confuse an economy booming because of loose economic policy, massive currency intervention printing Yuan to buy dollars, and stimulus that at a minimum rivals that in the Unites States. Also the Chinese property market is in one enormous bubble with vacant malls, vacant offices, and vacant apartments.

For more on the Chinese property bubble, please see ...

• Ponzi "Shark Loans" Fuel China's Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin
• Gold-Diggers in China say "Show me the House" - No House? No Car? ... No Marriage
• Stephen Roach says China's Housing Boom is Not a Bubble; I say "Nonsense"

The US appeared to be growing rapidly in 2006 and early 2007 on the backs of housing and commercial real estate expansion. When housing crashed, people were reluctant to spend, banks were reluctant to lend, and businesses were reluctant to hire.

Before anyone gets too excited about the miraculous looking expansion in China, one needs to take the above ideas into consideration.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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