what my intuition tells me now: Chinese Inflationary Pressures Just Won’t Go Away

Two pieces of news this weekend only serve to reinforce my view that China is experiencing massive inflation.  Chinese inflationary pressures just won’t go away despite the Chinese governments efforts to rein them in.

The first piece of news comes from China’s National Bureau of Statistics which reported that June 2011 inflation, as compared to June 2010, surged by 6.4%.  In May, the same year over year comparison saw an inflation rate of 5.5%.

As a point of comparison, the “official” Chinese governmental target for inflation for 2011 is 4.0%.  Yet, there has not been a single month in the half-year so far that has been under 4.0%.

Additionally, as I have written about before, for the Chinese government to acknowledge that numbers are worse than their official targets is a strong indication that the problem must be worse than reported.  Why?  Because official Chinese government statistics are routinely manipulated to satisfy bureaucrats.

The second piece of inflationary evidence is China’s growing trade surplus.  In June the trade surplus rose to $22.27 billion from $13.1 billion in May.  In other words, the Chinese economy now has an extra $9 billion that has been pumped into from just one month ago.

In an economy that cranks out $5.9 trillion in gross domestic product (GDP), that extra $9 billion represents an increase in inflationary pressure of just 0.2%.  However, these are marginal yuan; yuan that are spent and probably quickly in the Chinese economy.  If the trade surplus were to continue to rise at a similar rate (unlikely) then inflation would be up another 1.8% on top of all of the other inflation.

These inflationary pressures are likely to have profound social consequences.  For example, as I wrote about recently, almost 92% of Chinese are considered lower class.  Yet, food inflation in June 2011 was a whopping 14.4%!  The poor spend disproportionately high amounts of money on food.

Having less money means having fewer economic options.  So what exactly are the poor expected to cut back on to compensate for a loss of purchasing power of 14.4% on such an important monthly budgetary item?

This is why I feel that there is going to be an increasing amount of social unrest in China as its inflationary bubble bursts.  In fact, there is already evidence of growing social unrest in China, even though the economic bubble has yet to burst.

In conclusion, the theme of the Chinese economy right now is not as it has been for two decades: growth.  No, the theme now is: inflation.  This is a marked change.  That the Chinese economy is no longer talked about in terms of growth by economists or Chinese bureaucrats is a strong sign that investors would do well to avoid China.

Jason