Now, the rest of the econosphere is catching up. Here’s Financial Times:
ADB warns of inflation risk for China and India
By Kevin Brown in Singapore
Published: January 16 2010 02:00 | Last updated: January 16 2010 02:00
Inflation is emerging as the key economic problem for India and China as growth surges in the wake of the global financial crisis, the Asian Development Bank warned yesterday.
The ADB also said that south-east Asian economies would need to make significant financial, fiscal and structural adjustments to protect themselves against future economic shocks.
Haruhiko Kuroda, the ADB’s president, told a regional forum on the crisis in Manila that China’s surprise increase in bank reserve requirements on Tuesday was “appropriate” for the risks facing the world’s third-biggest economy.
“Inflationary pressures have not been so much prominent in the Chinese economy at this moment. But in some cities, real estate prices have risen sharply over the last several months,” said Mr Kuroda.
Prices are already rising sharply in China. It’s savings are being jeopardized. Like the rest of the world, China is poised at the edge of the cataclysm. Instead of deflation as is the case in the US and the Eurozone, the outcome in China is likely to be inflation tending to hyperinflation.
Real estate and equities are already exhibiting hyperinflation. Other than these asset classes there are few other means for ordinary Chinese to hedge against price rises. As inflation takes hold, the value of Chinese savings diminishes, the pressure to spend rather than be ruined increases proportionately.
As China’s export markets sag – indicating the threat of incipient deflation reaching China itself – the establishment needs to increase domestic consumption. It can only do this by putting more renmmbi into the hands of its citizens; by loans, grants, wage increases and pension payments. Adding to currency/lending basis is the recipe for inflation, something that is hard for China to avoid as it seeks to increase purchases sufficient to support its massive commercial and industrial expansion.
China’s establishment can halt inflation but to do so would require more than the tepid, jawboning approach hinted at so far. It would require a Paul Volcker- esque 10% rise in bank borrowing (funds) rate or more. China cannot afford to exercise such monetary discipline as its government- connected business insiders would rebel.
Look for China’s central banker to talk about inflation and restraint while keeping the stimulus pedal to the metal. Watch ordinary, garden variety inflation morph into out and out 30% per month currency debasement. I cannot see how this can be avoided.