One Reason Why China is Exporting Inflation: Your Government

Monday, March 10, 2008 22:43
Comments Off on One Reason Why China is Exporting Inflation: Your Government

This morning, I was reading an article published a couple of weeks ago over morning coffee, and I had to have a bit of a laugh to myself. To be honest, there is nothing overly protective or critical in the article As China’s inflation soars, world fears knock-on effects, but for some reason a spark went off in my head.

More than the decoupling conversation, and the snow storms, the effect of rising prices in China has become the topic of conversation. It is a conversation that many are having in and out of China, and what is interesting is that those of us in China have been watching the pieces fall into place for a long time… and those outside of China (in the media at least) seem to have missed it.

Now, before I go any further, I must make it clear that I am only going to address a few of the issues and couldn’t possibly cover all the reasons for China’s inflation in a single post… much less what the ripple effects will be.. However, the author opens the article with

But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 percent in January, is ramping up the costs of doing business in China, with potential knock-on effects for the rest of the world.

As China’s currency has strengthened sharply against the dollar, the government has scrapped export tax rebates, while more stringent labour laws and even the ice and snow storms in southern and central China have further driven up costs.

with the effect being

“China’s inflation is having a domino effect on worldwide inflation, especially in the United States,” Li Huiyong, an analyst from Shanghai-based SYWG Research and Consulting, told AFP.

and without going any further into the article, it appears that the various countries in the E.U. and the U.S. who were constantly chiding China can pop a cork of bubbley because they have succeeded. Their actions to raise the RMB, reduce China’s competitiveness have worked.. and the people they represent can now feel safe.

or is what they wanted actually not what they wanted?

and shouldn’t they thank the central party for taking these steps rather than spinning it into a story of China’s prices are now having a negative impact on U.S. and other economies?

More than a year ago when I wrote my very first post on the Politics of the RMB, this was an issue that I saw coming, and feared to some degree. After all, in letting the RMB loose and tightening VAT rebates the Chinese have accomplished exactly what was asked of them. they have made good manufactured in china and exported to other parts of the world more expensive.

and it begs the question… can china ever win? will their policies, or reactions to policies ever be celebrated?

As someone who has been watching this from inside the wire, I often find the international reaction (press coverage, political rhetoric, etc) more interesting than the policy shifts that occur. We have seen changes in real estate investment laws, M&A, labor, environment, and so that each brought China’s economy to a higher level. Many of the policies were not just strong, smart, policies, but they reduced many grey areas where off balance sheet opportunities existed for foreign and domestic firms.Now that the economic impact of these policies is being felt though, and all those measures are beginning to take hold, the costs are rising, and the correction is occurring, I think it is time that we all step back and look at this for what it is….

an inevitable maturation of the Chinese economy, and more widely… globalization

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