Overheating China threatens global inflation

April 15, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Ian Campbell

China’s overheating may soon be the world’s problem. Data released on April 14 showed GDP rising at 9.7 percent in the first quarter, and consumer prices running at a too-fast 5.4 percent. The concern isn’t just that Chinese policy may tighten and growth slow. It is that spiraling Chinese wages, rising inflation and a yuan that needs to rise faster could create a source of global inflation.

China previously helped keep inflation low in the West because its abundant cheap labor and controlled currency made the export prices of Chinese goods very low — excessively so, in the view of China’s competitors. While the average price of U.S. imports from industrialized countries has risen by 31 percent since 2000, the price of imports from China has risen by just 2.7 percent.

That enabled Western countries to keep rates low, for although consumers binged, inflation stayed under control. And China’s surging foreign exchange reserves and purchases of Western debt provided another, ultimately poisonous gift: abundant cheap credit.

Now that China is inflating, the picture is changing. At least 12 municipalities and provinces have raised their minimum wages this year, according to state news agency Xinhua, half of them by over 20 percent. Inflation is becoming endemic. A trivial example: in export-rich Guangzhou, residents complain haircuts are up to 50 percent dearer, according to local press.

Rising prices and wages will be reflected in export prices, adding to inflationary pressures for China’s trade partners. And China’s likely response to its own inflation — to let the currency strengthen — will make things worse. The yuan has been allowed to climb by 4.5 percent against the dollar since June. But it’s clear that more is needed to reduce the impact of soaring oil and commodities costs and to curb the monetary emission associated with swelling foreign exchange reserves.

A faster rising yuan would please China’s competitors but also have an inflationary downside for the West: exported Chinese goods would become more expensive. Western governments will lose the inflation free ride China once provided. Inflation and rates may tend to be higher. That may mean slower growth and pain for borrowers — among them already stretched Western governments.


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4.5% currency appreciation in a near one-off sense does not make up for what has been a long run of inflationary pressure, a movement is clouded by the outright fabrication of data at times by provincial governments. Even Wen Jiaobao and others have addressed this.

Try checking out the food prices, housing rents and the like over the past 18 months, and tie that in with other normal measures. That’s pretty traditional fare for economics, and it will give you some idea of the reality. The landscape drawn by the author is accurate.

A note that I think the author might have tied into this; One of the true problems is the housing market bubble. The entire system is designed to almost entice Chinese to buy more houses rather than invest the money in other ways. The big question is whether or not the government can reign things in, or if we’re looking at a serious round of wealth destruction when the bubble bursts, and then a hard bottom.

Posted by dzoo35 | Report as abusive

@ fredicwilliams
Sites as Reuters should stop posting this kind of garbage anymore…

Posted by Santye | Report as abusive

America is still the primary economic model for capitalism. China is just trying to follow the model the same as many other countries dipping their toes into a free market capitalism system. It worked well for the US for quite a while, but regardless of what Ayn Rand, the GOP, Corporations, and the wealthy staunchly defend, it is simply not sustainable. Resources, markets, needs for goods and services have finite limits.
I suppose we thought that China and other nations would keep low wages and supress the standard of living so Wal-Mart and others could keep prices low and keep expanding to pump up thier stock values.
We need to somehow tweak that model so that it is OK for profits and earnings not having to increase every year through consumption alone to be considered successful. Recycling, reuse, and other factors like providing for the general welfare have to also somehow fit in as profit incentives themselves. Keep making the same amount of widgets at the same selling price, but make more profits by polluting less, reducing waste, and helping the communities they reside in.

Posted by mikemm | Report as abusive

The way this article is phrased is basically scapegoating.

The bottom line is our relationship with them is all by our choice (they had less choice, they were so poor and desperate they basically transacted under a system we designed, so blaming them is like blaming slaves.)

Also the supposed cure is really no simple cure for the topic at hand. The article double-talks in that it says blames them for not appreciating their currency, but then recognizes this would fuel inflation in the US. So what does the author truly suggest? Who knows.

Perhaps it would be better if the article states we benefited greatly from a trade relationship we designed, got a free ride, got used to it, and now complain it has to come to an end.

Posted by mgunn | Report as abusive

strongly agreed @AM EDT

Posted by Haytt | Report as abusive

[…] First, let’s deal with the possibility of Chinese inflation being imported into the U.S. [1] [2]. Definitely import prices from China are rising, as shown in Figure […]

Posted by Chinese Inflation and the Impact on the US Economy | Global Economic Intersection | Report as abusive