Inflation in China 2007

In an article written last week called ‘whats all the fuss about the US dollar’ a point was mentioned regarding the
fall of the Dollar and its affect on China’s economy, one of the things mentioned was the inflationary pressure that
China will feel when a weak dollar means stronger currencies can purchase more and more commodities like oil.

layman interpretation: Oil is priced in US Dollars, so if the dollar gets weak (eg: at the moment we have a strong euro –
so if you went to New York for christmas shopping you could get more for less) then oil becomes cheaper to buy, because
everybody needs oil the stronger currencies will be readily able to purchase more and this drives up the price of oil because of demand. China needs oil and almost everything else to continue with growth and as they hold massive dollar reserves there is a twofold action taking place. Firstly their national reserves (in dollars) is worth less, so maybe thats why the Sovereign wealth fund of China is making moves to bail out the USA? Secondly it causes a quick rise in inflation as commodities drive up prices across all consumer sections.
Yesterday week it was announced that China is currently experiencing its hightest inflation in 11 years at 6.9%. Granted their economy is growing by practically that every year which is great but the average person there is probably not experiencing an increase in their quality of life equal to that of the national and market gain.

The consumer price index in China is driven largely by food, it accounts for 33%. If you look at economic models it tells us that this is indicative of a third world country. Its safe to say that for all the great things happening that the wealth is not filtering down effectively at any level.

Here are some questions:

What will China do when its work force gets sick of working in sweat shops and they demand decent wages?

What will happen if the workers for unions?

What will happen when there are widespread strikes and civil unrest due to prices spiralling out of control?
The last time this happened people got run over by tanks, but i don’t think that approach will wash in 2008.

What is the long term proposition for China if manufacturing goods at a reduced cost is no longer their sole competitive advantage?
China had an industrial revolution of sorts 1500 years before the rest of us where they were producing more steel (made with wrought iron and cast iron and a second -and better- type called Wootz steel) than Britain could over a thousand years later, but the problem then was the same as the problem now. Feeding a population that size. The country didn’t even embrace machinery fully until long after the rest of us. Why? Because when you have a billion people the Chinese method isn’t to go and buy a huge excavation machine to build a canal, its to go buy a million shovels and throw a human wall at any problem. This has changed in recent years but now that they are moving from agrarian society they are having problems feeding everybody.

I have concerns about China’s ability to balance all of this given their government, infrastructure and core societal beliefs. Having said that there are equally immense success stories pouring out and stories of a sky scraper a month going up. Plenty of room for thought.

Here’s a prediction which will take place in the next 12-18 month period: Commodity prices are raising, and yes that affects us all so the margins on chinese goods will increase but the inflationary pressure on joe citezen in China is going to be a source of trouble, in the next 18 months there will be riots, or workers organizations coming to the fore or China floating their currency or some kind of major move which will be done, something – my crystal ball is only at 50% capacity – is going to give the Chinese a serious boot in the keister. They will continue on the upward trend, this will however be a proper speed bump and will ensure that emerging nations take note should they find themselves replicating the scenario.

The fed cut interest rates as expected, they may also have to print more money and this two pronged approach (which will also make dwindling exports more affordable) could be their only way out. The latest statistics show that 29.8% (nearly 30%) of sub-prime loans in the US were delinquent last month, the real estate crush in america is far from over. We can take solace knowing that banks are businesses the same as the local coffee shop that had to close when starbucks came to town but what happens when the government gets involved?

There are issues like Government bailouts of Northern Rock in the U.K. but in the states the government actually gives loans as well. One in 15 VA loans are now delinquent and one in 8 FHA (federal housing authority) loans are behind for the last three months, maybe people there are at the stage where they don’t see the point in making repayments, a nationwide ‘unwillingness’ to pay would be a disaster, my suggestion? Do what you have to in times of desperation, desperate measures, reposess everything you can get your hands on and let people know you mean business. Draconian? Cold hearted? Yes, it is all of those things. At any rate the last time there were repayment issues this bad it was 1986, 21 years ago.

On some level my approach is already showing in the stats, foreclosures are up 70% in the third quarter to 2006, the highest on record…. ever…..

Woes are not over for the dollar, hence the Chinese effort to bail them out to a degree and also to get in and buy some dirt cheap stocks. A word of warning, scoring expensive jewellery on the cheap isn’t much good if your house is burning down.

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