Inflation: What if, What Next, and What are the Odds

Tuesday, January 15, 2008 1:24
Posted in category The Big Picture

Following the first session of What If, What Else, and What Are The Odds, where we discussed ideas about what was to come in 2008, we are now ready for our second session, inflation in China.

Over the last 12 few months there have been higher prices at the pump, for pork, and for oil. It is something that we are seeing more and more stories on (Danwei’s Sexy TV has even put out the fantastic clip see below) and in this session, we will look at what the worst case rates could be, what the impact(s) of high inflation will be, and what are the odds of various scenarios.

Like last time, I am putting up a few of the questions we will address during the session to see what you the readers think.

  • What is the current real inflation rate?
  • Is inflation likely to increase or decrease over the next 6 months? 12 months? 24 months?
  • What impact will inflation have and who will be impacted the most?
  • Can the central party continue to hold prices at current levels? Should they?
  • What impact will/ could inflation have on foreign operations in China?
  • What is the best way to hedge/ take advantage of a period of high inflation?

So, watch the clip below, read this report from China Leadership Monitor, this post from China Confidentialand then answer the questions above.

Please use a real address when commenting as I will be happy to send extra some notes on the discussion

[youtube width=”425″ height=”335″][/youtube]

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6 Responses to “Inflation: What if, What Next, and What are the Odds”

  1. Levin says:

    January 15th, 2008 at 9:36 am

    For decades prices and production levels of all things are government controlled in China. Prices changed little before 1984. Therefore, price control was successful in China for decades, even when the west was facing 18% inflation, and doubling of oil prices. I don’t see why China cannot put the lid on, and subsidize, forever, until all the reserves are gone. Therefore, it is doable.

    I have no idea whether they should do it or not, because that depends on what Chinese government wants. If Chinese government wants stability and rule forever, it better start subsidizing.

  2. Rich says:

    January 15th, 2008 at 9:47 am


    Appreciate the comments. To be honest, while I have no proof of anything at this point, I would guess that holding prices is something that China shouldn’t do over the long term.

    One reason why I am a bit concerned is that in Sept/ Oct when they froze prices, they said it was a temporary measure.. Now, they are saying it is temporary as well (perhaps trying to get everyone how for CNY?).

    I guess the question is what the effect of holding prices is, and what the government is doing to really solve the core issues while prices are frozen.

    Is there an economist in the house?


  3. k says:

    January 15th, 2008 at 9:57 am

    “I don’t see why China cannot put the lid on, and subsidize, forever, until all the reserves are gone.”

    Uh, because that would be shortsighted, deplete the reserves and not solve anything in the long term.

    Either China is a market economy and consumers learn to deal with a natural ebb and flow in prices, or they go back the the time everything was cheap but nothing was available.

  4. Rich says:

    January 15th, 2008 at 10:10 am

    K – as In K for Keynesian Economic Theory?

    I would agree that depleting the reserves to sustain the price level would not be ideal. Perhaps short term it is a cost, but long term this money will be needed for education, healthcare, etc

    There is a lot of play on the RMB needing to revalue now more than ever, some say that the prices should be allowed to jsut adjust and let the chips fall where they may.. is that the solution?

    If not… what is?

    also.. what is the longest duration prices should be held, and what should the government be doing behind this to make sure once prices are freed that all hell doesn’t break loose?


  5. k says:

    January 15th, 2008 at 10:03 pm

    I’d prefer laissez-faire to Keynesian, thanks.

    As for duration, I think it best to let the market dictate prices indefinetely.

  6. Levin says:

    January 16th, 2008 at 2:40 pm

    All economist would know that price control is not a long term solution, and cause more problems than it solves. Furthermore, price control as a short term measure is only effective if the underlying problems are short term, one shot. However, the current price increases are due long term consequence of economic boom. When people are richer, they want to consume more and better commodities and energy. Removing agricultural land and convert them to industrial, commercial and residential land do not increase the capacity for producing food, and potable water. Laboour cost will certainly increase, which will not help with the price increase either. The demand and supply gap is a permanent one, and can only be solved through imports, at world price, which is much higher than the local price in China. Short term price control will just delay, but aggravate the impact when the control is lifted, actually making it worse.

    China can either increase the supply of food through increase in production or import, or reduce demand in the long run. And I haven’t heard anything along these lines yet.

    The government can control the price and not subsidize. This will make supply even more scarce. Or it can control the price and subsidize. This will eventually exhaust the reserve, unless demand can also be lowered. Or it can put control on for a short time, like till after September 2008, and lift it, and let the price jump through the roof. That is not a nice thing to do either. The government will be stuck with a permanent price control for a long long time if it starts one now.