China’s GDP: President Hu Jintao says high inflation won’t force an appreciation of China’s currency. Maybe it should. Consumer prices rose 4.6 percent in December, year on year, and the economy is growing at an above-trend annualised rate of 13 per cent. An overheated Chinese economy is creating inflationary pressure, and the undervalued yuan exacerbates the issue.
Inflation has been a threat for months, but is now a reality. Household inflation expectations are at their highest level in a decade, according to the most recent survey conducted by the central bank. December producer prices were up 5.9 per cent from a year earlier, signalling non-food consumer prices have further to go. Clothing may get more costly, after cotton prices jumped 86 per cent in 2010 according to Deutsche Bank, and minimum wages are rising.
A hyperactive economy, as shown in newly released GDP figures for 2010, poses the risk of a wage-price spiral. Monthly retail sales growth typically rose at 20 per cent, year on year, for most of 2010. An export recovery has fuelled growth further, with net exports contributing 8 per cent points to China’s GDP growth in 2010, where it contributed negatively in 2009. And no wonder: despite the fast-growing economy, the yuan was flat against a basket of currencies in the year of 2010, according to JPMorgan.
Rising money growth will add to the pressure. Chinese banks usually front-load their lending at the start of year. So credit growth is usually the lowest in December and highest in January.
A cheap yuan will keep attracting money into China. Forex reserves rose by $460 billion in 2010, meaning the same amount of yuan was injected into the system.
China is using a “package plan” to curb inflation, to quote Hu. But it is hard to exclude the exchange rate from the toolbox. Much of the excess liquidity has come from foreign money either earned by Chinese manufacturers, aided by a low exchange rate, or attracted by yuan appreciation expectations. Beijing’s tolerance for inflation is becoming stretched. The official target was 3 per cent for 2010, though the State Council seems to be willing to accept four per cent and consumer prices are now running close to five percent. Hu can’t dodge the exchange rate issue for much longer.