China’s food price inflation hits 14.4% in June

China CPI Jul11.pngSince Q4 2008, China has been creating one of the largest credit bubbles in history. First, it doubled bank lending to $1.4trn in 2009 (one third of GDP), and then maintained it close to this level. Secondly, it added a stimulus package worth another 13% of GDP ($580bn), focused on providing cheap electrical goods and autos.

It also seemed not to realise that its own development process was about to move into a different phase. China can no longer depend on the constant supply of cheap labour to keeps its goods competitive in world markets. Instead, labour shortages have begun to appear, as we discuss in chapter 2 of our new eBook ‘Boom, Gloom and the New Normal’.

Its most recent policy failure has been to imagine that price controls could keep inflation under control. In fact, just as the blog feared when the policy was announced, these have caused food prices to soar even further, as farmers cannot afford to sell at a loss:

Pork prices, a staple food in China, are up 68%, having risen continuously for 10 weeks since the new policy was announced
• Food price inflation is now 14.4%, up sharply from last month’s 11.7%
• Overall inflation is at 6.4%, nowhere near the government’s 4% target

Equally, of course, worries are beginning to appear about the quality of lending that has taken place since 2008. Moody’s, the ratings agency, warned this week that “the scale of such loans could pose a threat to China’s banking system“.

Sometime soon, the government may finally realise it has to get serious about controlling inflation. This is almost certain to require a period of sharply lower growth. Housing markets, which have been supported by the lending, could also come under major pressure.

The next 12 – 18 months may prove to be a rocky ride.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. 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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