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Friday, March 11, 2011 11:57 AM

Food Prices Rise 11% in China, Overall Prices Rises 4.9%; Central Planning Idiocy; China's Impossible Dream

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Food prices continue to soar in China and the overall prices are up 4.9% officially. Nonetheless, the Chinese central bank has ruled out currency appreciation and has also ruled up curtailment of credit.

The New York Times has additional details in China’s February Inflation Held at 4.9 Percent

China's February inflation stayed elevated on a double-digit rise in food prices, adding to pressure for communist leaders to cool surging living costs they worry could fuel unrest.

February consumer prices rose 4.9 percent while food price inflation accelerated to 11 percent from January's 10.3 percent increase. That exceeded Beijing's 4 percent target for the year and defied forecasts by analysts who expected the rate to ease.

Inflation, especially in food prices, is dangerous for China's leaders because it erodes economic gains that underpin the Communist Party's claim to power. Poor Chinese families spend up to half their incomes on food.

Speaking at a news conference held in connection with the annual meeting of China's legislature, central bank governor Zhou Xiaochuan said inflation is stable, though at a "relatively high level."

Zhou ruled out major changes in credit or exchange rate policy. Analysts say Beijing has fueled inflation by keeping interest rates too low to ward off the global crisis and could cut import costs by letting its tightly controlled currency rise faster against the dollar.

"The main instrument for managing inflation is not the exchange rate regime," Zhou told reporters. He added later: "When we make adjustments to interest rates we cannot think about the consumer price index only. We have other objectives, such as the impact on liquidity in the market."

Beijing has tried to mollify the public by paying food subsidies to poor families and ordering local leaders to see vegetable markets have adequate supplies.
China's Impossible Dream

  • China does not want to hike rates
  • China does not want to curtail bank lending
  • China does not want the Yuan to rise
  • China does not want inflation to exceed 4%
  • China does want 7-10% growth

China is going to overheat to the point of implosion unless it does something it does not want to do. Sustained 10% growth, or even 7% growth is no longer possible.

China refuses to come to grips with that reality. Instead, Chinese banks keep making real estate loans for properties no one can afford and no one even lives in.

Central Planning Idiocy

So, what does China do to curb inflation?

  • Increase food subsidies
  • Orders vegetable markets have adequate supplies

That is so funny. It is also typical of central planning buffoons.

The only way to ensure adequate supply is to let the free market set prices. Otherwise, if prices are set too low there will be shortages, and if set too high there will be an abundance of sellers willing to supply the government with produce.

Ordering vegetable markets to have adequate supplies shows stunning ignorance about simple supply/demand issues.

Mike "Mish" Shedlock
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