Chinese Price Rises Could Break The Bank
|
Credit crunches, mortgage meltdowns, leaping LIBOR rates, bank bailouts, horrendous house prices...almost everything on the financial pages seems to be a double dose of gloom and doom.
Yet through it all, share prices haven't crashed. Slightly down from their highs, but showing few signs of prolonged panic as the Bank of England shored up the market with its December rate cut.
But we've all heard about straws and the backs of camels. And there is one compote brewing on the other side of the world that could act as the catalyst in collapsing the whole house of cards.
China's annual inflation rate climbed 6.9% in November, up from 6.5% in October and the biggest rise in 11 years.
As in previous months, it started with the pigs. Pork prices surged 56% in November from a year ago, pushed by a swine shortage.
Overall food costs, which make up a third of the consumer price index, leapt 18%. Non-food prices rose 1.4%, up from a 1.1% increase in the previous month as utility prices added 5.6%.
Why is this a problem for the West?
Over recent years, China has been probably the world's main disinflationary force. In other words, it has manufactured and exported a huge range of cheap goods which have kept prices down in Europe and North America.
Despite soaring asset values and energy costs, headline consumer prices have stayed broadly within government targets.
But in 2008, that could be about to change.
The Chinese economic engine is overheating.
The trade surplus has grown sharply, with November's number up 15% to $26.3bn (£13.1bn) from a year earlier, the third biggest ever balance, with the $15bn surplus with the States lifting the year-to-date total for the US to $149bn.
A combination of sharply rising domestic inflation, industrial pay that has gone up four times over the last five years and the soaring cost of industrial metals is likely to force up future prices that Chinese manufacturers will demand for their output.
So the next big export from Shanghai is set to be a large helping of rising inflation.
What are the Chinese authorities doing about it?
The Ministry of Finance has ordered state owned companies to pay dividends of up to 10% of their profits to the government, which may help curb ‘excessive' growth in capital spending.
With property prices jumping almost 10% within the last year, Chinese regulators have tightened home lending criteria to dampen speculation. The People's Bank of China has ordered lenders to raise reserves to 14.5% of deposits, up from 13.5%.
The government is talking tougher about credit controls, moving to a ‘tight' money policy next year from the previous ‘moderate' tightening stance and also allowing currency appreciation to help shrink the trade surplus.
So though China's 12-month lending rate has reached nine-year highs after five hikes this year, more loan cost rises are on the cards for 2008.
Even this might bad news for the West. A stronger yuan would lower import costs, but export prices would rise even further.
In a previous piece on this subject I suggested that Chinese inflation might be lower in the panic pecking order for the UK than issues closer to home.
But public expectations of higher UK consumer prices have already reached their highest level since records began 8 years ago, according to a recently published Bank of England survey.
With the risks of imported inflation clearly accelerating, the Bank's new interest rate cutting policy could be broken almost before it has started.
And the stock market would find that very unnerving indeed.
More: What Not To Buy: All The PE In China
Skip Navigation