China set to become exporter of inflation

A few years back we talked of the China Effect - where the rapid transformation of the Chinese economy and the huge growth of high volume low labour-cost manufacturing was acting as a supply-side cause of lower prices in the world economy. A decade or more of this may be coming to an end as the Chinese economy risks experiencing several more years of higher inflation and slower economic growth.

This article from the Telegraph “China inflation threat underestimated” reports on research from economists at Legal & General Investment Management that pinpoints of some of the inflationary impulses in the Chinese economy - notably the surge in credit, higher food and other commodity prices and the rapid rise in wage costs in urban areas as cities find the pool of cheap labour from the countryside is not running behind demand and creating labour shortages. This piece from the Economist provides a super chart on what has happened to Chinese wage costs in recent times. China’s tricky wage dynamics Despite recent increases - wages in Chinese manufacturing in 2008 were still only about 4 per cent of those in the USA.

If the Chinese authorities are truly serious about controlling inflation we can expect further tightening of monetary policy in the coming months driving the Yuan higher and curbing the rate of growth of real GDP. China has a new growth target of 8% per annum. Might this prove to be an over-estimate if the over-heating economy enters a clear slowdown phase?

BBC News: China grew at a robust 9.7%, as inflation hits highs Al Jazeera: China’s inflation continues to rise

Data from Timetric.

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China: CPI: all items, Prices, labour costs and interest rates (A… from Timetric

Yuan v the US Dollar

Data from Timetric.

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China / U. S. Foreign Exchange Rate from Timetric