China Inflation Gets Out of Hand
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.