The blog continues to worry about signs of a slowdown in China.
Major commodity trader, Glencore, said this week "we see a pullback in China and it will continue". This challenges the views of Dow CEO Andrew Liveris last month, and Rhodia CEO Jean-Pierre Clamadieu - who said last week he saw "no material signs of a slowdown".
Clearly it is still an area where reasonable people can disagree. But this week's evidence on inflation and bank lending seems to support the downside view:
• China's inflation (see chart) hit a new 3 year high of 5.5% in May
• Even more seriously, food inflation was at 11.7%
• Bank lending is finally slowing
• January-May lending was 12% lower than 2010
Food prices matter in a poor country like China. Guangdong is a wealthy province but average wages for a garment worker are just $300/month. Farmers in poorer provinces like Sichuan earn less than half this. Unsurprisingly, social unrest is therefore spreading, with riot police reportedly used in Zengcheng, a Guangdong city of 800,000 people.
China's Academy of Social Sciences forecasts 6% inflation in June, after the energy price rises. And so calls are intensifying to further slow the economy. The central bank raised reserve ratios to a record 21.5% following the inflation news, and clearly more tightening is on the way.
As my fellow blogger, John Richardson has reported, lack of credit is already restricting chemical trade. Opening a letter of credit used to be as easy as calling the bank, in the boom lending days of 2009/10. But today, foreign currency credits are being restricted, meaning that maybe 3/4 banks have to be involved just to buy one cargo.
The length and depth of the downturn will depend on the property market:
• Prices have skyrocketed with easy lending, and Beijing is now the 28th most expensive city in the world, alongside Vienna and Copenhagen
• Speculation has led to 64.5 million empty homes, according to the Academy of Social Sciences. Whilst the Beijing Real Estate Association has warned there is "a rather big bubble in the city's real estate market".
The government thus remains between a rock and a hard place, as the blog has warned for the past 6 months.
If it makes lending too easy, food inflation will continue to soar. If it cuts back too hard, property markets could implode. Its task in now managing this delicate balance is not going to be easy.