*****Chinese Dynamics Mean Exploding Global Inflation*****

China Daily reports that Chinese CPI grows first time since Jan.

(emphasis mine) [my comment]

CPI grows first time since Jan
By Xin Zhiming (China Daily)
Updated: 2009-12-12 07:25


The price tags on food items in a Beijing supermarket on Friday are a source of displeasure for this woman. [China Daily]

China's consumer price index (CPI), a major measure estimating inflation, rose by 0.6 percent in November, the first year-on-year rise in consumer prices since January, according to the National Bureau of Statistics (NBS) data released on Friday.

Though the NBS said the country was not facing inflationary pressure, analysts feared the continually rising consumer prices could make controlling inflation a challenging task next year, when the CPI could cross 3 percent.

NBS spokesman Sheng Laiyun said rising food prices and the energy price reform have contributed to the CPI rise.

To save energy and protect the environment, the government has raised the prices of fuel and the charges for electricity and water supply to better reflect market demand.

Early snow in northern and central China, which harmed agricultural production and transportation, also contributed to the rise in food prices. In the last week of November, for example, vegetable prices rose 31.8 percent from the previous month.

Moreover,
compared with last year, the price of crude oil has almost doubled, driving up China's domestic fuel prices and contributing to the recent price rises, said Matthew Circosta, an economist with Moody's Economy.com. And the spiraling effect of the jump in oil prices, which add indirectly to freight and packaging costs, has pushed up prices of agricultural products.

The rising prices, especially of food, have aroused worries among ordinary people. A woman taxi driver, surnamed Guo, who lives in northern Beijing, said rising prices of food items such as vegetables, meat and rice had forced her to cut her spending to make ends meet.

Analysts said inflation could keep rising because the government had decided to continue its pro-growth policies.

"With the economy continuing to grow strongly, the overall demand and money supply both would remain strong, which would push up inflation further," said Dong Xian'an, chief economist of Industrial Securities. And the CPI could rise above 3 percent next year.

"Demand side price pressures are gathering momentum," Circosta said. Despite moderating on year-on-year terms last month, the retail sector remains robust as NBS statistics show China's retail sales in November grew by 15.8 percent year-on-year.

"With fiscal stimulus still to work through the economy, firming up domestic demand would boost retail sales, putting upward pressure on inflation," Circosta said.

Inflation about to explode

Predicting where inflation statistics (CPI numbers) are going isn't hard. Back on November 17, I predicted that Chinese (and world) CPI numbers were about to turn positive.

Chinese (and world) CPI numbers are about to turn positive

Below is a chart showing China's monthly CPI. As you can see, since February, CPI numbers have been negative, but that is about to change...



The reason CPI turned negative last year was the collapse of commodities. Oil and agricultural commodities started trading at lower prices than they did a year earlier, which drove the cost of food and gas down. However, this November things are about to change.

Below is a chart of oil prices last year. See the price plunged from $90 in October to $60 in November?



Oil prices are now higher at $80, which is $20 more than a year ago. Higher year on year commodity prices will quickly start showing up as positive CPI numbers around the world and in China.

As predicted, Chinese CPI turned positive in November, but this is just the beginning.

Oil (and other commodities) continued falling in December last year and then averaged around $45 out in Early 2009. With oil prices now around $75, nearly double what they were in January 2009, we are going to see some serious inflation in CPI numbers going forwards, especially with 2010 Food Crisis driving up food prices.

The next round of overheating has begun in China

Imarketnews reports that the next round of overheating has begun in China.

Press: China PBOC Researcher Warns Of Econ Overheating Risk
Sunday, December 20, 2009 - 20:42

BEIJING (MNI) - China's economy is again flirting with the risk of overheating, a central bank researcher warned in comments published Monday.
< /b>
People's Bank of China researcher Jiao Jinpu was quoted by the official China Securities Journal as saying that 2010 will see the "ideal situation" of high growth and low inflation, but warned that monetary aggregates are already pointing to overheating.

"Looking at monetary liquidity and its flows, the next round of overheating has begun," he said.

China's economy is expected to comfortably meet the government's growth target of around 8% this year, though some economists warn that the cost of this will be felt in a fresh round of bad loans in the banking system and a severe excess capacity problem in certain industries.

Broad money, as measured by M2 growth, accelerated to a record 29.74% at the end of November while M1 also hit a record at 34.63%. M1 growth, in particular, is linked to increases in inflation with a time lag, the PBOC has warned in the past.

The PBOC has been reducing the volume of its sterilization operations in recent weeks though bond traders in the interbank market expect biweekly auctions to increase in size in the coming weeks as the central bank agrees to pay increasing amounts to holders of its paper.

China's exploding money supply driving up prices

China's increasing supply of Yuan means there is a lot more money is chasing its domestic supply of commodities. As a result, the prices of commodities in China are higher than the rest of the world, and this price imbalance is leading to record commodity imports (Chinese producers are buying commodities abroad rather than pay higher domestic prices).


Chinese Money Supply

Chinese Money Supply Growth



Chinese Money Supply Growth (6 month rolling average)



Huge Soybean Exports to China

Nogger reports about huge soybean exports to China.

Thursday, 17 December 2009
eCBOT Close, Early Call

The overnight grains closed lower across the board, pressed by a firmer US dollar. Beans finished around 7 cents lower, with corn down 5 and wheat down 9-10.

While the Fed left rates unchanged as expected, the announcement that liquidity measures would expire in February 2010 is being seen as a big positive for the greenback, which is up around 1.3% on the day against the euro and 1.5% against the pound.

Whilst not entirely unexpected, Greece getting another downgrade from S&P; is also knocking the euro.

Weekly export sales for corn at 1,227,100 MT - a marketing year high - were well above trade expectations. Wheat and bean sales in line with expectations. Soybean shipments of 1,663,100 MT were again mostly to China at 1,303,900 MT.

Chinese exports about to turn STRONGLY positive

Chinese export growth is calculated year on year, and you can clearly see in the chart below where the 13.8 percent October fall in exports comes from.



By looking at what exports were a year ago and comparing them with the latest monthly imports, it is possible to get a good idea where Chinese export growth is headed. For example, looking at the chart above, Chinese export is 100% guaranteed to turn STRONGLY positive in January and February 2010, which will lead to pressure to appreciate the yuan.

Dramatic rise of yuan will be catastrophic for the US

Investors.com reports about China's Reluctance To Let Yuan Rise.

China's Reluctance To Let Yuan Rise Is Mixed Bag For U.S.
By SCOTT STODDARD, INVESTOR'S BUSINESS DAILYPosted 12/02/2009 07:09 PM ET

Chinese leaders have so far resisted U.S. and global calls to let the yuan rise vs. the dollar. At least from their perspective, they see good reasons to keep their currency steady for the time being.

After letting the yuan rise 20% vs. the dollar in the three years to mid-2008, Beijing put the clamps on further gains as the global recession began pummeling the nation's export-heavy economy.

A weak yuan makes Chinese exports cheaper. Critics say that's forcing American companies offshore, eroding support for relaxing global trade rules and fanning trade disputes.

"The world trading system is going to blow up, or the U.S. economy is going to totally deindustrialize"
[Too late. The US economy is already pretty much deindustrialize] unless China loosens controls on its currency, said Peter Morici, a University of Maryland business professor and a former chief economist at the U.S. International Trade Commission.

China's monthly trade surplus with the U.S. jumped 9.2% in September to $22.1 billion as the reviving American economy sucked in more inexpensive Chinese goods.

Already, Washington has slapped punitive tariffs on Chinese-made tires and steel pipes, prompting Beijing to launch a probe of U.S. auto imports. European and other Asian countries also complain that the cheap yuan is harming their exports. (Since the euro zone and most Asian currencies are soaring vs. the dollar, they're also soaring vs. the yuan.)

"We're getting very close to the tipping point," Morici said.

But China thinks it's done quite enough, thank you, for the global economy. Its huge — and effective — stimulus package has helped fuel a global revival. Its global trade surplus has plunged over the past year. October global exports were still 13.8% below a year earlier [Chinese exports about to turn STRONGLY positive]. As for China's U.S. trade surplus, it was down 20.6% year over year. [The US is exporting massive quantities of soybeans (over 7 MMT in November) and other agricultural commodities. This makes the US trade balance look better than it really is.]

Meanwhile, others warn that any dramatic yuan move may not be so great for the U.S. [It will be catastrophic]


China holds down the yuan's value by using cash from its trade surplus to buy Treasuries. If Beijing lets the yuan rise, it may not need to buy as much U.S. debt. That could push up interest rates and complicate Washington's efforts to finance its huge budget deficit, and undercut a housing recovery.

"The U.S. government needs help from the Chinese to support our government debt, and China seems to be one of the only other countries that's empowered to buy U.S. Treasuries at this point,"
said Thomas di Galoma, head of U.S. fixed income rates trading at Guggenheim Partners.

That may be one reason why President Obama didn't press too hard on the issue during his China visit last month.

Appreciating yuan means surge in global inflation

When China appreciates yuan in response to 2010 Food Crisis, it will do more than damage the US treasury market. More importantly, "cheap Chinese consumer goods" will stop being so cheap anymore. Prices will jump at Walmart and other retailers around the world, leading CPI numbers everywhere into the double digits.

Chinese Yuan Becoming an International currency

Businessweek reports that new global role ahead for Chinese yuan.

New Global Role Ahead for Chinese Yuan
As the dollar and euro face new pressures, Hong Kong's former central bank chief Joseph Yam calls for a strengthened role for the Chinese yuan
Click here to find out more!http://ad.doubleclick.net/ad/mgh.bw.general/general;page=By Bloomberg News

(Bloomberg) — Hong Kong's former central bank chief Joseph Yam said that the yuan can become the "third pillar" of the global monetary system as deteriorating public finances erode confidence in the dollar and the euro.

"Large budget deficits and public debt, and structural problems in the financial system, mean that the two pillars are not resting on sound foundations," he said at a financial conference today in Beijing. "There is a need for a third currency to serve as a third pillar, which would also give an opportunity for the two weak pillars to heal."


China is promoting greater use of the yuan overseas after Premier Wen Jiabao expressed concern in March that a weakening dollar was eroding the value of the nation's $2.3 trillion in foreign-exchange reserves. The government should allow foreign financial companies and importers to purchase yuan more freely for investment and trade, Wu Xiaoling, a former deputy governor of the People's Bank of China, said at the conference.

China this year allowed 365 companies in Shanghai and the southern province of Guangdong to use yuan in cross-border trade with Hong Kong and members of the Association of Southeast Asian Nations from July 2. The government in October sold 6 billion yuan ($879 million) of bonds in Hong Kong to help elevate the "international status" of its currency.

Chinese Yuan Becoming an International currency

In order to prevent a collapse of international trade next year as the dollar collapse (See 2010 Food Crisis), China will be forced to allow the settlement of cross-border trade in yuan as well as allowing financial companies and importers to purchase yuan more freely for investment and trade. In effect, the dollar's instability in 2010 will for the Chinese yuan to assume the role of reserve currency. Needless to say, this will compound the dollar's troubles, accelerating the currency's freefall.

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11 Responses to *****Chinese Dynamics Mean Exploding Global Inflation*****

  1. Jimmy says:

    Nice article, but a typo:

    you wrote:

    Chinese Yuan Becoming an International currency

    The will cause the ...(what?)... The dollar can’t compete with the yuan

    greetz

    Y

  2. Mark says:

    Yuan appreciation would also imply the next oil shock.... and that would have negative effects on China's Asian trade partners, too.

    If oil prices go way below 70 US$, I think China will reconsider to let the Yuan appreciate... so cuase and effect may be exactly the other way round: a weak US economy reduces the price of oil and the trade deficit with Cina... two reasons to let the US$ finally go to hell.

  3. Oddjosh says:

    Found this article today, a Chinese central bank official comments on US Treasuries: http://www.shanghaidaily.com/article/print.asp?id=423054

  4. RossInvestor says:

    Eric,

    Very good analysis. However, DON'T YOU EVER READ THE COMMENTS??
    As Jimmy pointed out on 12/21 you have an incomplete sentence in your conclusion where you state "The will cause the ." Would you be so kind as to complete your thoughts and respond to your readers?
    Thanks

  5. RossInvestor said...
    Eric,

    Very good analysis. However, DON'T YOU EVER READ THE COMMENTS??
    As Jimmy pointed out on 12/21 you have an incomplete sentence in your conclusion where you state "The will cause the ." Would you be so kind as to complete your thoughts and respond to your readers?
    Thanks

    I do read the comments, but sometimes I sleep, work on other entries, etc...

    "The will cause the" was something I forgot to delete.

  6. Aaron Krowne says:

    Why don't you think that China will instead fall back from this trend into deflationary collapse ? (not that I think it will, but the two sets of expectations on where things are headed and particularly China's trajectory are so diametrically opposed, I would like to hear some specific debunking arguments...)

  7. Carmen says:

    Not the yuan appreciation will trigger the inflation.
    The gun was loaded by FED, pourring dollar all over the world.
    The chineses will only pull the trigger when the time comes.

    Why nobody sais anything about food inflation in nord america?
    why we care about prices in india and china? you do not need any CPI to see that food price almost doubled in 3 years.

  8. Numonic says:

    Aaron Krowne good question. For me it's still up in the air if China will continue it's stimulus and expanding credit programs or why they would choose to do so. I don't like it when people say China can't consume what the US consumes. That is not true. China doesn't need the US to consume it's products, it can consume it's products on it's self. But I do understand that it is still a choice whether China chooses to increase domestic consumption/expansion of credit or not and I'm not sure if they will or not, or why. US consumerism being dead might be one factor but I'm still not sure. It's a good question. Why would China expand credit so much over this past year only to discontinue it's expansion of credit/domestic consumption? I don't know, good question.

  9. It seems to be a culmination of events that will lead to the ultimate demise of the U.S. dollar.

    The chinese seem to be saying that since they are currently getting less dollars from exports to the U.S. that they have less of a need to buy U.S. treasuries with those dollars. This is one upward pressure on U.S. interest rates and thus holders of U.S. bonds, which leads to selling of U.S. dollars. The other problem is a possible upcoming food price inflation in China. However, in the past, China has had much higher food price inflation without having to strengthen their currency due to public discomfort. On the other hand, what Numonic said about China not needing the U.S. is correct. If China let it's currency strengthen then the people in China can make up for the lost export business because they will be more able to purchase the products that they currently ship to us (in dwindling numbers).
    I think that the chinese are calculating the best time to strengthen their currency, and it may be soon.

  10. Jimmy says:

    @Eric:

    Don't worry about respect, I know you're a good and busy man. Only it's pity that I focussed on Uruguay (plenty possibilities + big port for big boats and easy foodtransport --> important for the costprice of oil/transport) and not on Russia (I've had bad experiences with Russia and owning properties by other peoples/friends...). If I had participated with you...

    But I wish you many succes with your project and finding clever investors. I know, it's not easy with much propaganda of the ugly elitists who steals the money of uninformed and naďve investors...

    But keep posting, you will attract other foreign investors with your great knowledge!

    And merry Christmas!

    Y

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