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China’s inflation out of control

Chemical companies, Consumer demand, Currencies, Economic growth, Futures trading
By Paul Hodges on 18-Apr-2011

China CPI Apr11.pngChina’s inflation hit 5.4% last month. As the chart above shows, it has more than doubled over the past year. And food prices jumped 11.7%. Clearly, inflation is now out of control, with the Ministry of Finance admitting the situation is “severe and hard to handle“.

A sign of the scale of the problem is that the government is taking increasingly desperate measures in response:

• Major industry associations have been ordered to delay or cancel all price increases
• Price controls are being applied to basic products such as flour and cooking oil.

Equally, it is still moving far too slowly on the key issue – the credit bubble that has developed as a result of its bank lending binge of the past 2 years. Q1 bank lending was down 13% versus 2010, but at $330bn it was still 70% above 2008’s pre-crisis level.

Sadly, therefore, the blog sees no reason change its December view that China is between a rock and a hard place in terms of policy options. It feared then 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.”

The first signs of this bust may now be emerging. An excellent ICIS Insight analysis by my blogging colleague, John Richardson, suggests “sharp corrections are on their way” in many key petchem markets. Its title says it all – “Events in China could signify dark days ahead“.

UPDATE: China has raised reserve ratios by a further 0.5% today. Whilst the IMF has warned of “boom-bust cycles” if Asian governments fail to deal quickly with overheating problems