Chinese inflation: China's overheating may soon be the world's problem. Data released on April 14 showed GDP rising at 9.7 per cent in the first quarter, and consumer prices running at a too-fast 5.4 per cent. The concern isn't just that Chinese policy may tighten and growth slow. It is that spiralling Chinese wages, rising inflation and a yuan that needs to rise faster could create a source of global inflation.
China previously helped keep inflation low in the West because its abundant cheap labour and controlled currency made the export prices of Chinese goods very low - excessively so, in the view of China's competitors. While the average price of US imports from industrialised countries has risen by 31 per cent since 2000, the price of imports from China has risen by just 2.7 per cent. That enabled Western countries to keep rates low, for although consumers binged, inflation stayed under control. And, China's surging foreign exchange reserves and purchases of Western debt provided another, ultimately poisonous gift: abundant cheap credit.
Now that China is inflating, the picture is changing. At least 12 municipalities and provinces have raised their minimum wages this year, according to state news agency Xinhua, half of them by over 20 per cent. Inflation is becoming endemic. A trivial example: in export-rich Guangzhou, residents complain haircuts are up to 50 per cent dearer, according to the local press. Rising prices and wages will be reflected in export prices, adding to inflationary pressures for China's trade partners. And China's likely response to its own inflation - to let the currency strengthen - will make things worse. The yuan has been allowed to climb by 4.5 per cent against the dollar since June. But it's clear that more is needed to reduce the impact of soaring oil and commodities costs and to curb the monetary emission associated with swelling foreign exchange reserves.
A faster rising yuan would please China's competitors but also have an inflationary downside for the West: exported Chinese goods would become more expensive. Western governments will lose the inflation free ride China once provided. Inflation and rates may tend to be higher. That may mean slower growth and pain for borrowers - among them, already stretched Western governments.
