China Inflation Gets Out of Hand

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Economists around the world have said that China could not expand at its current pace, with both imports and exports rising over 40% last month, without creating inflation. New data from the People's Republic has proved them right. The National Bureau of Statistics reported that consumer prices rose 2.7% in February. According to Bloomberg, that's the highest level in 16 months. Earlier, the government reported that industrial production was up over 20% during the first two months of the year, and on March 10th, China released its extraordinary import and export numbers.The source of the inflation is clear. China said its banks made $103 billion in new loans last month, the latest a long string of increased liquidity driven primarily by that nation's $585 billion stimulus package. The effects of the package appear to have revived the national economy, which is now expected to generate GDP growth of 8% this year. The by-product is bubbles in real estate and equity values.

China has begun to curb bank lending, but with the amount of money already circulating in the economy driving down access to capital for businesses and consumers, it will be like trying to put a genie back into a bottle. The liquidity already in the system will not simply disappear.

The return of inflation is partially the result of long emerging trends. China's industrialization has brought millions of people from rural areas to cities where factories produce the huge supplies of goods that the nation exports. China passed Germany as the world's largest exporter last year. The migration has created a middle class in the nation's large cities, which has access to higher wages and consumes accordingly, driving up the prices of retail goods, food, and energy.

China has also financed the opening of factories, taking advantage of its relatively inexpensive labor in order to seize manufacturing and export market share from nations like Germany and the U.S. Those programs have clearly worked, but the demand for raw material and energy are the result of rapidly increasing factory activity. That demand has caused higher prices.

How does China deal with its inflation problem? To some extent that may have to do with whether it can pass the costs of raw materials and labor on to trade partners like the U.S. That will mean higher costs of finished goods. With the U.S., Japanese, and EU nations still in economic slumps, exporting inflation from China through higher priced exports will be very, very hard.
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