It is pretty amazing that China has experienced rapid growth without rate hikes for electricity, but such has been the case for two years. The resulting power shortages are getting dire according to “China Raises Power Prices as Shortages Loom“:
“China’s electricity demand is running so far ahead of supply that it is expected to be short of 30-40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11.”
China is hiking rates by 3% for some users in an apparent effort to cool demand and/or encourage the production of more supply. It is feared that increases in supply will only further drive up the price of coal and offset any profits power companies would have otherwise earned.
Nightly Business Report produced a short video segment describing China’s inflation woes (transcript included) called “China’s Inflation Battle.” The commentator identifies China’s RMB¥ 4 trillion stimulus program (about $585B USD at the time) as the original source of the inflation and takes us to Pengshui, 1000 miles from Beijing, to see some of the examples of how inflation is impacting the lives of the average Chinese person.
The most interesting quote came from Associate Professor Patrick Chovanec of Tsinghua University, School of Economics and Management:
“When you see over 50 percent growth in the money supply, the question isn’t, why is there inflation? The question is, why isn’t there more inflation? Why haven’t we seen it sooner? The reason is because a lot of that money didn’t go into a consumption boom. It went into an investment boom.”
It is a scary thought to think inflation problems could (will?) get even worse once the Chinese figure out how to make use of all this massive investment.
In “Beijing turns to currency to cool inflation“, the Associated Press gives a good summary of China’s current problems with inflation, including the following:
“Economists blame China’s inflation on the dual pressures of consumer demand that is outstripping food supplies and a bank lending boom they say Beijing allowed to run too long after it helped the country rebound quickly from the 2008 global crisis.
Attempts at price controls, subsidies for the poor and orders to local leaders to guarantee adequate vegetable supplies have had mixed results.”
The failure to control inflation to-date is forcing China to allow the currency to appreciate faster. The near-term increases still seem modest at 5% (against the dollar), so it will be interesting to see whether China continues pushing harder on non-currency methods.
China’s currency is not traded on open markets, but if it were, it seems the currency would soar given current conditions.
I typically ignore most of the inflation numbers reported by the government, but I could not resist reading Calafia Beach Pundit’s latest piece titled “Consumer price inflation is heating up.” Calafia takes a look at the CPI from all angles, month-over-month, year-over-year, rate of change, and even non-seasonally adjusted (which is the basis for payments to TIPS). Calafia convincingly demonstrates that all arrows are pointing upward for inflation. He even concluded that China’s current struggles with inflation will be America’s future inflation problem:
“The ongoing rise in China’s inflation rate is making headlines today, but U.S. inflation is not too far behind, as this chart shows. It’s not surprising that inflation should be moving higher both in China and the U.S., since China has essentially outsourced its monetary policy to the U.S. Federal Reserve by pegging the yuan to the dollar. Chinese inflation is somewhat more volatile than ours, and that is also not surprising since its economy is smaller and less burdened by long-term supply and labor contracts. If China has an inflation problem, then so does the U.S. It will just take longer for the problem to become obvious in the U.S.”
This piece is a must-read.
Disclosure: author is long TIPS
In “China inflation may hit 6 pct, no end to tightening -paper“, Reuters reports that the official China Securities Journal insists fighting inflation is the number one job for monetary authorities. Given a consumer price index hitting 32-month highs in March and likely to rise as high as 6% this year, China will continue to hike rates to thwart these inflationary pressures.
Yesterday, China’s central bank increased interest rates for a fourth time in six months.
In “China says cannot lower guard against inflation“, Reuters reports that “China’s Premier Wen Jiabao said on Saturday inflation was affecting social stability, and taming it was a top priority for this year…The government is aiming for annual average inflation of 4 percent in 2011, higher than the 3.3 percent rise in consumer prices last year.”
The article notes several measures Chinese authorities are taking to curb inflation, everything from increasing food supplies, reducing transportation costs, and controlling the money supply and bank lending. These measures seem to be working, but the Chinese are not declaring victory just yet…
China raised interest rates for the third time in four months as the scramble against inflation continues. For a good accounting of the move and its implications see “China raises rates to battle stubbornly high inflation.”