China battles food and house price inflation

China lendFeb11.pngWhen China announced that inflation had reached 5.1% in November, the authorities insisted it was only a temporary peak. But this seems less likely today, with January’s inflation still at 4.9%.

The surge in food prices is very worrying. They jumped 10.3%. And with a major drought underway in the North East, there is a clear risk that basic food prices could shoot higher, if the wheat crop is hit.

Equally, the government’s loose lending policies must take some blame:

• It may have seemed a good idea in early 2009 to double lending in response to the financial crisis. But the amount was far too much, at $1.4trn, one third of GDP, in addition to a $580bn stimulus programme worth another 13%.
• Policymakers then added to the problem by maintaining a high level of lending last year, at $1.2trn. This money helped to fire up speculation on the Dalian futures exchange and in property markets.

And, as the chart shows, 2011 has continued on the same path. January’s lending was still over Rmb 1trn ($158bn).

A month ago, the central bank started to tighten lending. But it seems they were then over-ruled by the politicians. Of course, interest rates were raised this month. But when one could earn 21% last year in the Shanghai property market, an extra 0.25% interest cost is a drop in the ocean.

The government seems increasingly caught between a rock and a hard place. If they now clamp down on lending, they risk a downturn in the economy. Credit bubbles of this size don’t usually go quietly. But if they allow the boom in lending to continue, higher food and property inflation seem inevitable.

Sadly, therefore, the blog sees no reason to change its December view that:

Those in charge will continue to take small steps, but fail to step hard enough on the brakes. In turn, the current ‘boom’ in China’s demand will continue to support the global chemical industry for the next few months. But clearly the risk is rising that we may then discover, too late, we have simply been in the middle of yet another China ‘boom and bust’ scenario.”

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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