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On the Effects of Chinese Inflation

I have often thought that international macroeconomics boils down to looking at all of the big nations that have some degree of economic flexibility, and are willing to make non-economic decisions for political purposes.  They drive the excesses in the global economy through their actions.

It is not as if their actions have no cost, but that the cost is realized later.  They get to impose their will for a time, but eventually their non-economic actions catch up with them, impoverishing them, and set the stage for the next set of actors to abuse their power.

Tonight, I want to talk about China.  Bloomberg has a great piece up about Andy Xie, former Morgan Stanley economist who posits that China will head into inflation because of their monetary and fiscal policies.  If true, it is my opinion that a bursting of a China Bubble will decrease demand across the world.  The world depends on a China with increasing demands for all kinds of raw goods.

My view is that China is stretching itself too far economically.  The powers that be chose too fast of a growth path, and inflationary consequences will come, and spread to assets in China, as well as Western nations.

In the long run, there is no free lunch.  No country can permanently force the rest of the world to do their bidding, whether that is buying up debt, or buying goods or services.  Eventually the terms of trade change, and either value is delivered, or trade collapses after a default.

Be aware.  The global economy could shift down dramatically if China has to slow down its economy because if inflation.






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8 Responses to On the Effects of Chinese Inflation

  1. Indy says:

    Any investment strategy ideas if one is convinced of either of the two following scenarios: ?

    1. China’s stimulus is creating a building, employment, production, and asset-price bubble that will collapse eventually.

    and/or

    2. China is headed towards rapid inflation and will have to slow itself down to bring it under control.

  2. 呵呵,有意思,路过,来顶下!

  3. Greg says:

    Doesn’t China have a (relatively) free out from inflation?

    In the first Bretton Woods agreement, the US “exported” inflation to other countries by artificial pegging of whatever currency to the US dollar. When the other countries couldn’t take it anymore, they demanded the US sell them gold at the Bretton Woods “rate” — and then eventually the system collapsed.

    In the current setup (often called Bretton Woods II), the Chinese are in a similar problem because of their “need” to peg the Yuan to the US Dollar. That need stems from a desire to promote trade, but since the US consumer is out of real money, the amount of real trade (not vendor financing) has dropped… so China’s motive to peg the dollar and promote trade is a lot weaker if not evaporated

    When China accepts this, they can let the yuan float. The dollar collapses relative to the yuan, and the inflation that China currently “imports” from the US is stopped

    Problem solved — or more accurately the problem is sent back to the money printing spendthrifts that can’t seem to live within their means

  4. someone says:

    imho inflation and/or ending bubbles will not substantially degrade the manufacturing capacities of china and therefore they will continue exporting almost as much as in the past.

  5. Nate says:

    translate.reference.com gives me:

    “Oh, interesting, passing to the next roof!”

    Your guess is as good as mine as to the meaning…

  6. Marc says:

    The Chinese is unintelligible — probably the result of English that was put through a translator. As for the point of the post, I wouldn’t buy into any prediction but your main point is something that I feel isn’t stressed enough when people talk about the Chinese economic miracle. Current Chinese government exchange policy benefits a small minority of the population, owners of export oriented industries, while at the same suppressing affluence of the overall population. The size of the policy intervention in terms of reserves represents not a indicator of success but rather a measure of the size of misallocated resources. While Chinese policy brings political benefits and short term economic benefits, over the long term the policy will retard China’s development into a 21st century economy. The rest of the word will move on to whatever the future of the world economy isbecoming and China will be left with yesterdays factories and promises to pay.

  7. anonymous says:

    Chinese inflation might be beneficial, in a way. If Chinese wages and prices go up with inflation but the nominal exchange rate remains the same, this provides an alternative mechanism for correcting imbalances without the politically difficult step of actually meaningfully revaluing the yuan.

    Inflation wouldn’t harm Chinese asset prices either, because the stock market and real estate are the only options for Chinese retail savers seeking to avoid confiscatorily low interest rates on savings accounts.

    All of the above might actually boost Chinese stocks, at least the ones oriented towards domestic consumption. Inflationary environments are bad for stocks in Western countries, but in China asset inflation will probably move in lockstep.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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