*****Inflation Accelerating In China*****

China Daily reports that CPI rise stokes inflation fears in China.

(emphasis mine) [my comment]

CPI rise stokes inflation fears
By Wang Xiaotian and Xin Zhiming (China Daily)
Updated: 2010-03-12 06:49
As real interest rate turns negative, analysts divided on whether tightening policies needed

BEIJING:
A key gauge of inflation rose by a stronger-than-expected 2.7 percent year-on-year in February from 1.5 percent in January - the fastest clip in 15 months - adding pressure on the government to tighten policies.

Given the 2.25 percent one-year interest rate on deposits,
the consumer price index (CPI) growth means the real interest rate has returned to negative for the first time since 2008, raising the possibility of an interest rate hike.

The CPI rise was mainly caused by food price increases during Spring Festival. Prices rose by 6.2 percent, compared to 1 percent for non-food prices, the National Bureau of Statistics (NBS) said on Thursday.

Severe weather conditions also drove up food prices, said Sheng Laiyun, NBS spokesman.

Analysts said that given the Spring Festival effect, policymakers should not hasten to tighten policies.

"Only after key figures for March come out should we discuss about a possible rate hike," said Dong Xian'an, chief macroeconomic analyst of Industrial Securities.

...
Industrial output increased 20.7 percent year-on-year in the first two months, 16.9 percentage points higher than a year ago. Fixed-asset investment rose 26.6 percent, slightly higher than the same period last year. Retail sales increased by 17.9 percent year-on-year in the first two months, and the producer price index, which measures factory-gate prices, went up by 5.4 percent in February.

"Most of these data are stronger than expected
and this trend should likely make policymakers tighten monetary, fiscal, exchange rate and real estate policies, as well as restrict financing options for local government-sponsored investments," Ma said.

China's Monthly CPI

Chinese CPI numbers are accelerating upwards.



Businessweek reports that Inflation Eroding China Deposits Feeds Asset Pressure.

Inflation Eroding China Deposits Feeds Asset Pressure
March 12, 2010, 1:54 AM EST

March 12 (Bloomberg) --
China's accelerating inflation has started to erode household savings, threatening to spur purchases of property and stocks and fuel asset-price pressures.

Consumer prices rose a more-than-forecast 2.7 percent in February, the most in 16 months, the statistics bureau said in Beijing yesterday. The increase means the rate exceeds the one- year deposit rate of 2.25 percent.

So-called negative real rates skew incentives to spending just as China's economy is already accelerating -- reports this week showed exports rose, industrial production accelerated and new loans exceeded forecasts. The central bank may raise interest rates within the next three weeks, Standard Chartered Bank Plc, Nomura Holdings Inc. and Royal Bank of Canada said.

"A growing number of households will now realize that their deposits in the banking system are losing purchasing power," said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. The jump in the inflation rate last month "will increase the social and political pressure for a rate hike in the near term."

'Fear of Inflation'

Since October, the government has highlighted the importance of managing inflation expectations as the nation rebounds from the global financial crisis and commodity costs rise. Eleven of 15 economists surveyed yesterday said that interest rates may rise in March or April.

Barclays Capital yesterday increased its projection for China's inflation rate this year to 3.5 percent from a previous estimate of 3 percent.

"Fear of inflation" will help to drive property purchases in China because people want "hard assets," Zhang Xin, the chief executive of Soho China Ltd., the biggest developer in Beijing's central business district, said in an interview on Bloomberg Television today.

The company reported yesterday that 2009 profit surged more than eightfold.

Premier Wen Jiabao aims to hold full-year inflation around 3 percent after banks flooded the financial system with money to drive an economic rebound.

Crisis Policies

Gross domestic product grew 10.7 percent last quarter and
People's Bank of China Governor Zhou Xiaochuan said March 6 that anti-crisis policies, including the yuan's peg to the dollar, must end "sooner or later."

A surge in one gauge of money supply included in this week's figures also signals spending will quicken. Last month's 35 percent gain in M1, the measure of money supply that includes demand deposits, signals households' intentions to buy "big- ticket items," property or st ocks, said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong.

China's exploding money supply driving up prices

China's increasing supply of Yuan means that 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 (6 month rolling average)



China's Monthly CPI VS M1 yr/yr growth



Newsweek explains that It's China's World We're Just Living in It.

It's China's World We're Just Living in It
The middle kingdom is rewriting the rules on trade, technology, currency, climate—you name it.
By Rana Foroohar and Melinda Liu NEWSWEEK
Published Mar 12, 2010
From the magazine issue dated Mar 22, 2010

Back when President Obama lived in Indonesia, in the late 1960s, China loomed as a malign force to the north, where communist cadres plotted to export their revolution to the rest of Asia. The Jakarta he'll visit later this month has an entirely different attitude toward the People's Republic. Local companies are doing deals in yuan, the Chinese currency, rather than dollars. If Jakarta gets in financial trouble, as it did back in 1997, it will be able to call on a $120 billion regional reserve fund, an Asia-only version of the International Monetary Fund due to be launched this month, bankrolled in part by China's massive foreign-exchange reserves. Asia's key economic and political issues are no longer being hashed out on trips like Obama's—between individual nations and the United States—but at summits that include only China, Japan, South Korea, and the Southeast Asian countries. "China has been instrumental in this shift in focus from 'Asia-Pacific,' which was largely about the U.S. and Japan, to 'East Asia,' which has China at the center," says Martin Jacques, author of When China Rules the World.

Fair enough: everyone understands that China deserves a big say in what goes on in its neighborhood. But
what most people haven't noticed yet is that Beijing also wants to write—or, at least, help write—new rules of the road for the world. "China now wants a seat at the head of the table," says Cheng Li, director of research at the John L. Thornton China Center at the Brookings Institution. "Its leaders expect to be among the key architects of global institutions."

It's easy to forget that big international bodies like the IMF and the World Bank were created by just a few nations, led by the United States. These economic organizations have global reach, but that globe used to be dominated by the American superpower, and their policies were suffused with U.S. values. When Beijing was a small-stakes player its leaders didn't always like the setup, but they lived with it, even facing down fierce grassroots opposition to join the World Trade Organization.

But now China has more worldwide clout, and public opinion at home has taken on a combative (and sometimes downright jingoistic) tone. So with one eye on China's national interests and the other on domestic critics accusing the regime of "coddling" the West, Beijing has begun to push harder to reshape international systems to make them more China-friendly (and, in the process, to raise the regime's chances of survival).

Ironically, U.S. officials often complain that Beijing isn't more involved in running the world—declining to help security efforts in Afghanistan, for instance. But in most such cases, China is being asked to take part in a system it didn't set up—one it views as inherently biased in favor of the West. The Chinese are far more eager to participate in groups they've had a hand in building, like the Shanghai Cooperation Organization, a sort of Central Asian NATO in which China (as might be guessed from the name) plays the leading role. While that alliance started out as something of a joke in 1996, it's grown into a pillar of regional security.

Similarly,
Beijing's efforts to push the yuan as a rival to the dollar are now making tentative progress. In the last few months, China has inked $100 billion in currency-swap agreements with six countries, including Argentina, Indonesia, and South Korea. The yuan has become an official trading currency bet ween Southeast Asia and two Chinese provinces along its periphery. "The yuan will next be used as a trading currency with India, Pakistan, Russia, Japan, and Korea," says Gu Xiaosong, director of the Institute of Southeast Asian Studies in Nanning.

Those countries will eventually be able to use the Chinese currency for deals between each other. And in an-other low-profile but important step toward making the yuan a freely convertible, international currency,
Beijing issued its first international bond offering in Hong Kong late last year.

Equally quietly,
Beijing is helping re-design the Web. Recent headlines have focused on China's spat with Google, which announced it would refuse to abide by local censorship rules anymore after the company's networks were hacked from Chinese computers. But separately, the Chinese have been working hard on the next generation of Internet standards—what's called IPv6, for Internet Protocol version 6. The current version, IPv4, is expected to run out of usable IP addresses as soon as next year. That day can't come soon enough for Beijing, since the vast majority of addresses—some 1.4 billion as of August 2007—have gone to American businesses and individuals, versus a measly 125 million to China. That's fewer than one IP address per 100 people, compared with five per person in the United States.

IPv6 will provide trillions of new addresses for everything from Web sites to intelligent home appliances and military applications—and Beijing intends to get its share of them. China may also get a new opportunity for cyber-spying: unlike the previous architecture, IPv6 allows addresses to be attached to specific computers or mobile devices, which would give the regime greater ability to police its Netizens.

All these efforts are motivated by an odd mix of confidence, pride, and insecurity. On the one hand, China knows its technological capabilities are dramatically improving and sees a chance to move beyond the West in certain fields.
"There's always been this feeling in China and a number of other developing nations that the West was the place to be—and now suddenly it's not," says Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management. Chinese scientists and researchers are flocking home to conduct original research at well-funded labs.

On the other hand, the Chinese worry that if they're not involved in writing the new standards, those could be manipulated by their enemies. The regime has tried to bar government computers from running Microsoft software, for example, largely because it's assumed that such software might include a "back door" that would allow the U.S. government to launch cyberattacks against China.

Indeed, while China isn't necessarily looking to take over the world, its actions all put Chinese interests foremost. Beijing's space programs are highly secret, but they've been ramped up in recent years with the first successful test of an antisatellite weapon in 2007, followed this year by the launch of an exo-atmospheric surface-to-air missile (which some Western security experts think may actually be a new satellite-killer weapon). Earlier this month China confirmed plans for its second unmanned lunar probe in October and the 2011 launch of a space module for the country's first docking exercise, all leading up to a 2013 moon landing.
With NASA's budgetary rollback, China is now the only country making major investments in space exploration.

Why the big push to reach the moon?
Beijing clearly expects more material gain from its celestial adventures than the Americans have gotten. Some Chinese scientists are sure that space is the place to find potential new energy sources like helium-3, as well as fresh lodes of rare minerals that are being gobbled up by industrial production on earth; Ye Zili of China's Space Science Society has been quoted as saying that when the Chinese reach the moon, they won't "just pick up a piece of rock"—a clear dig at past U.S. missions. The rules governing the exploitation of extraterrestrial resources have yet to be written. When they are, China wants its stake to be well represented.

The same principle explains the country's overall drive to move ahead of the rest of the world: to make sure it gets a real say in setting its future rules and standards.
It knows it can climb the economic ladder more easily in new and developing technologies than in traditional industries, and that's why
China, the world's biggest polluter, has also become the single biggest state supporter of green technology. Thanks to massive government subsidies, it's now a world leader in solar- and wind-energy hardware and is moving fast to set the standard in the next generation of clean-energy vehicles. Batteries made by the Chinese firm BYD are already used in at least a quarter of the world's mobile-phone market; now the battery maker is leading the global race to adapt these batteries for cars, the biggest remaining hurdle in creating a viable market for electric and hybrid automobiles.

Thanks to state mandates,
China already has the largest fleet of clean-energy vehicles in the world. As the technology improves, you can bet Beijing will push clean cars throughout the Chinese consumer market (which last year overtook the United States in sheer numbers of vehicles sold). And should the Chinese succeed in developing not only the automotive field's gold-standard technology but also a market of that size, they can expect to control the future of the global car business.

If and when that day comes, it will be interesting to see whether the Chinese—and the world—continue to support the current rules of free trade and open global competition that helped provide their current level of peace and prosperity
[the current "peace and prosperity" are founded on a lie (the "might" of US ponzi economic)]. Already one can see worrisome changes in the way China deals with foreign firms. Ten years ago Beijing did everything possible to woo investors from abroad. Today the rules have changed. The country's $800 billion fiscal-stimulus package channeled much more clout to state-run firms and away from the private sector. New merger laws are making it tougher for foreign firms to acquire Chinese companies.

In December, the U.S. Chamber of Commerce and 33 other business organizations from around the world sent a letter to Beijing protesting legislation that they claimed would effectively bar foreign firms from China's lucrati ve government-procurement markets. Beijing is even taking control of the venture-capital business. One of the world's top private-equity firms, the Carlyle Group, was recently obliged to join forces with the Beijing city government in order to be allowed to invest in more deals in China.

The idea that as China got rich it would simply become more like America, or at least more sympathetic to the U.S. agenda, is turning out to be wrong
[the US doesn't HAVE an agenda. That is the whole problem with the US: zero long term planning (ie: lack of action on social security and the chronic budget/trade deficits]. China has never been transformed from without, and it's unlikely to be now. Among ordinary Chinese, pride in their nation's prospects is matched by a nagging feeling that it's all still too new and precarious. The dizzying pace of change is having a particularly dramatic effect on younger Chinese, turning them inward and making them more nationalistic—a trend that experts like Hudson Institute fellow John Lee believe to be a factor in China's new and more aggressive policies on security, trade, and foreign affairs. That aggressiveness is only likely to increase between now and 2012, when the top leadership of the Communist Party will be changed. Officials jockeying for positions between now and then will "lose points if they are perceived as being too soft in any sort of negotiation with the U.S.," says Li of Brookings.

... It's nowhere near clear what our world will look like when China has done its part to reshape it. But the journey toward that world promises to be a bumpy one.

CSmonitor asks how long will China support the US dollar?

How long will China support the US dollar?
China is continuing to buy US bonds, but it doesn't really a choice — for now, at least.

http://www.csmonitor.com/var/ezflow_site/storage/images/media/images/0311-china-lending/7559682-1-eng-US/0311-china-lending_full_380.jpg
An employee counts Chinese yuan banknotes at a Bank of China branch in Hefei, Anhui province March 10. Chinese banks extended about 700 billion yuan ($102.5 billion) in new loans in February, half that of January, as the government clampdown on lending took hold, state media said on Wednesday.

By Bill Bonner Guest blogger / March 12, 2010

China says it is continuing to buy US bonds "every day." It doesn't have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February '09. This leaves it with a lot of foreign money — most of it in dollars. What can it do with so much money?

China has quietly bought stakes in America's leading companies...and in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.

That said, China could also cause one helluva problem for the US if it ever chose to do anything else. [get ready for one "helluva problem"]

No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China's holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.

He surely means it. And when the dollar goes down...and when the market turns, and China feels compelled to get rid of its US bonds, he'll be totally sincere when he explains that to the international financial press too.

Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time — since 1983, to be exact [when banks started security lending...]. As a result nearly everyone — including the Chinese — are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.

So far, no problem. But there's no telling how long the foreigners will continue to support the dollar [until the 2010 Food Crisis really gets rolling (2-3 months)]. Then what? Well...it leaves quantitative easing...in which the US central bank lends the money itself. Where does it get the money? It just invents it.

Which is why you can't trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it 'til death do you part. But then, along comes another dollar that looks just like it...fresh...young...full of vim and vigor. So why not? Everybody does it.

Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists' lingo, the velocity of money goes up...and the value of the dollar — like a faithless lover — goes down.

China's new dollar peg




My reaction: It is only matter of a few months before accelerating inflation forces Chinese authorities to break the country's dollar peg. When it does, the dollar will drop like a rock.

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5 Responses to *****Inflation Accelerating In China*****

  1. Curtis says:

    Yes, I must agree with you. The dollar is going to drop like a rock.

    But if the market starts to sink first, it could hold off the dollar from sinking as investors go for safety. Then after the market sinks, then the dollar will sink.

  2. Sailor says:

    I enjoy your blog a lot, but your red-on-tan format is hard for me to read as I am partially color blind. Blue-on-tan would be better.

  3. mila says:

    Yes, it's gonna be a doozy...

    FA in CA

  4. sudhaman says:

    CHINA will never rule the world. Just search for similar kind of articles written 25 years ago and u will find japan in it. did japan rule the world, it did not. thats because they have illegal practices in trade and they followed mercantilism. the same goes with china, it also does the same mistakes japan did and they are goanna heavily pay for it. the dollar may fall in the short term like any other currencies but it will not collapse because of its great dynamics,the dollar hasnt collapsed so far and will not collapse. its the chinese economy whose exports will become expensive to the world will collapse. the USA might have a runaway inflation but ultimately it will be brought down by higher interest rates like volcker did a long time ago. in the midst of these many asian contries will collapse due to a strong dollar in the future.CAPITALISM NEVER FAILS, but communism will fail

  5. Numonic says:

    Yeah Curtis is right in the 2nd part. If the US banks contract credit enough it would counter the devaluation of the US dollar that would be caused by China changing the rate of it's peg to the US dollar in favor of the Yuan. So a changing of the peg rate by China won't necessarily devalue the US dollar because it depends on the rate US dollars are chasing goods in the US and if US banks contract credit enough, it would be enough to counter the appreciation of the Yuan against the US$ and the value of the dollar could possibly not change at all or if the contraction of US credit is more than the move in the peg rate, we could experience an appreciation of the US dollar. But the appreciation won't be because of the move in the peg rate, it will be because of the contraction of credit in the US.

    The peg makes it more expensive for China to import from the US and makes it cheaper for US to import from China(at the current rate that it is set). The more importing(consuming) China is doing, the more money they have to spend, which is causing prices to rise(especially when importing from the US). So the only reason China would choose to move the peg rate in favor of the Yuan is if it also chooses to import(consume) more. The only thing that would cause China to choose to import(consume) more is if consumption around the world drops dramatically like it did in late 08 and late 09. Consumption around the world dropping dramatically would cause China to lose allot of export jobs and push China to create domestic service sector jobs which would also benefit China's producers whom have a back up of unsold/unshipped goods. These goods would then be sold domestically. But it's like I said before, US is driving this ship, China is only following. The only reason China increased it's consumption so much in 2009 is because consumption in the US and around the world fell so dramatically in late 08 early 09. It wasn't the other way round. Had the world not lost the consumption of late 08 early 09, we would not have seen the consumption we saw from China in 2009. So China is only following the US and it will do so with the peg. The contraction of US credit will come before a peg move in favor of the Yuan so I see no reason to fear the peg move will devalue the US dollar. US is the leader, China is the follower.

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