CHINA INFLATION'S IMPACT

Effects of China's Inflation on World Economy

Effects of China's Inflation on World Economy

Introduction

Recently there was an unexpected rise in China's consumer price index for November when it clocked in at 5.1%. Not only did it beat expectations, but it also printed the fastest rise in consumer prices since July 2008. Food prices weighed heavily in the equation, as it posted an annualized growth of 11.7%. Meanwhile, non-food prices also rose by 1.9% from October's 1.6% figure.

Other economic reports also lined up in favor of more tightening. A trade surplus of 22.9 billion USD in November tells us that foreign money is still pouring in, while a 24.9% rise in urban fixed investment, China's primary measure for capital spending, also signals more spending in the economy. Meanwhile, industrial output also beat expectations with a 13.3% rise in November from a year earlier.

Judging by those eye-popping figures, it sure looks like China should step up its efforts when it comes to cooling their economy down. You see, if prices keep climbing at such a fast pace, sooner or later, most Chinese households won't be able to afford to put food on their table or have clothes on their backs.

Of course, the People's Bank of China has to wield its superpowers in order to prevent this from happening. In fact, it already has implemented a bunch of tightening measures in order to keep inflation in check. On top of that, it still plans to conduct another set of "prudent" monetary policy moves next year. This could include four more rate hikes and further increases in their reserve ratio.

Now, the question on everyone's mind is: Will these tightening policies do the trick?

On one hand, some analysts agree that raising the reserve ratio could help keep inflation subdued. After all, one of the reasons why inflation is on the rise is the unprecedented increase in monetary supply. If loan growth is kept subdued through a higher reserve ratio, it could decrease money supply and eventually tone down inflation.

On the other hand, there are those who claim that increasing interest rates would have minimal effect on inflation. In fact, they argued that higher rates of return relative to other economies could even expose China to attracting more capital inflows, which could eventually lead to asset bubbles.

If they continue to hold back on raising rates, which effectively and artificially keeps the yuan cheaper, their export industry could receive a boost. And we all know that won't sit too well with USA.

Remember, the U.S has been bullying China to let the yuan appreciate for quite a while now, arguing that their artificially low currency gives them an unfair advantage in global trade. Even though that issue seems to have been shoved to backstage for now as the spotlight shifted to the European debt drama and quantitative easing issues, it's still likely that the so-called currency war could be back in focus.

Impact of China's Inflation on World Economy

The global economy has become so unbalanced that even ...