Chinese Inflation is Overflowing

China’s People’s Bank announced this morning that it is raising bank’s reserve requirements for the second time this year.  Again, this is to help stave off inflation in China.  The specifics of this move on the part of China’s banking authority are not interesting.  What is interesting about Chinese efforts at fighting inflation are:

1.  The many methods of inflation fighting that are being employed by the Chinese.

2.  The frequency of these announcements is accelerating.

MANY METHODS OF INFLATION FIGHTING

Thus far the Chinese have asked their banks nicely to not make so many loans, raised reserve requirements, raised interest rates, told banks explicitly that they cannot make off-balance sheet loans, raised the minimum wage in key cities, and even for god sakes allowed the Yuan to appreciate minimally in value.

This situation to me looks like what happens on a boat when it springs a leak: you throw every tool you have at your disposal in order to stop that leak.  If the first method doesn’t work you quickly move on to something else, and then onto something else, and then onto something else.  The faster the willingness to throw a new tool at the leak is a strong indication of the severity of the leak.  Which brings me to the second point.

THE FREQUENCY OF THESE ANNOUNCEMENTS IS ACCELERATING

The first hint that the Chinese have an inflationary leak in their economy came October 29, 2010 when it was rumored that they might raise interest rates.  Then it was almost two months until the next announcement of Chinese inflation fighting being ramped up.  So two announcements separated by two months.  But then in January there was another action taken by the government of China and so far in February we have four announcements in three weeks if you include today’s post.

To me it looks like a massive bailing of too much economic water – i.e. money – from the Chinese ship.  The question is how far into the recessionary depths the economic boat sinks before the ship regains its buoyancy.

In the meantime, evidence is quickly mounting that this is not going to be the year of the rabbit in China, but the year of the very fat inflationary rabbit.

Have a choice weekend!

Jason