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Inflation In China Is Rising At A Fast Pace

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HONG KONG — For K. K. Lam, a 37-year-old accountant in Guangzhou, inflation means higher prices for pork and for vegetables like bok choy.

For Allen Dong, the sales manager for a home appliance manufacturer 700 miles to the northeast in Ningbo, inflation means trying to persuade retailers to pay more for dehumidifiers so his company can cover rising costs for wages and raw materials.

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.

Separate data released on Friday by the General Administration of Customs showed that Chinese demand for imports also remained surprisingly strong. The trade surplus narrowed to $20 billion last month, and would have been nearly in balance without China’s $18 billion surplus with the United States.

But so much cash in the Chinese economy chasing a limited volume of goods is pushing up prices. Inflation is starting to become troublesome, especially for young people entering the work force and retirees on fixed incomes.

Young people with vocational school degrees typically earn $200 to $300 a month in factories near the coast these days, and somewhat less in the Chinese interior. Rising prices have prompted many to ask for bigger paychecks, and blue-collar incomes have increased faster than inflation.

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.

Pan Ning, the sales manager at the Newsunda Industries Company, a manufacturer of school bags and pocket calculators based in Shantou, said labor and raw material prices had been climbing by 5 to 10 percent. But as school years have begun around the world in the Northern Hemisphere, Newsunda has been able to raise the prices it charges to cover the increased costs, Ms. Pan said.

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.

I wonder what the true cost of inflation is in China as no doubt the govt will be very adept at massaging the inflation figures just like it's Western counterparts.

Still I'm sure it will be contained..

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Thanks for that, I was waiting for this. From what I read people who live there don't seem to view 3 or 5% as quite realistic.

The next step is if China will raise interest rates tomorrow, there is a fair chance they will. Whether they do or not I think there is a good chance the markets, commodities in particular, will react violently.

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Economic Stress and Property Bubbles, or Miraculous Expansion?

Let's not confuse an economy booming because of loose economic policy, massive currency intervention printing Yen 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.

Mish's view on this.

I'm sure there's been no malinvestment in China, central planning is very good at avoiding those sorts of complications.

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This is probably the most important news of the month in the world of economics. China's demand is strong enough that it is causing inflation in the country. Everyone else is trying to stimulate and when the stimulus stops the economy sort of stalls out. Whereas you want the free economy to be moving on its own accord.

It is a surprising turn of events too, because just a few months ago there was signs of demand trouble in China, like in automobiles.

If the inflation stays and starts going up the Chinese authorities will have to tighten. Which unlike western governments the Chinese have shown they will use a variety of tools, not just the interest rate. For example they adjust up and down the reserve requirement, which changes the leverage the banks can lend out.

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