By: Dr. Mike Campbell
Figures released for Chinese inflation for October have revealed that the general rate is 4.4%. The level has been high enough to trigger rumours that the Bank of China will be forced to raise interest rates. This was enough to see almost 10% wiped of the value of the Shanghai stock exchange since more expensive borrowing would cool Chinese business expansion.
Within the basket of figures, it has been revealed that food inflation has risen to 10.1% which is a real problem for the average Chinese citizen. Potentially, it could cause unease in Chinese society which may overspill into unrest.
Analysts believe that concerns over domestic inflationary pressure lay behind China’s criticism of the Federal Reserve’s decision to embark on a fresh wave of quantitative easing. QE is predicted to lead to devaluation of the US Dollar and will make US exports cheaper and imports costlier; including those from China – unless the Yuan is tied to the Dollar.
However, if China buys Dollars to maintain the value of the Yuan at the status quo ratio, it risks further inflation at home.
In a move to ease the problems caused by food inflation, China has announced that poorer households will be paid subsidies to help them cope with the higher food bills. If the current shortages of grains and vegetables worsen, the government has made it clear that it has not ruled out the imposition of price controls which is a luxury that the communist state has that the democracies don’t, of course.
They have also indicated that those caught hoarding food may be punished. The centrally planned economy has also said that it will ensure adequate diesel supplies are available after shortages were reported.