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The China puzzle is an easy one | Advantage zyaada

National emblem of the People's Republic of China

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The grave concerns holding the world to ransom and precipitating large action on minor inflections in Ireland and Korea ppossibly would be  a result of the growth economists in awe of a crisis ridden China. Never seen before in the last 25 years of a never ending growth cycle led by 20 years of reform, , the first hints of grwth slowing in China have really shut down many advisory shops gung ho on Asia or the Euro’s new hegemony as US patriots would have hoped. However, the problem is an easy one

The Shanghai Composite Index tumbled 1.9 percent to 2,828.28 at today’s close, extending the benchmark’s biggest two-week slide since May, sparked by concern that accelerated monetary tightening will crimp economic growth.

China’s plans to rein in prices include selling state food reserves, stabilizing the cost of natural gas and cracking down on speculation in and hoarding of agricultural products, the State Council said. The aim is to damp food inflation that reached 10 percent in October, more than twice the 4.4 percent headline rate.

Inflation Outlook

Standard Chartered Plc economists anticipate the consumer price index will rise by an average of 5.5 percent next year, with a peak gain of 6.3 percent in June. The bank estimates this year’s increase at 3.2 percent. That compares with a 0.7 percent decline in 2009.

China will sell soybeans and vegetable oil from its stockpiles starting this week to stabilize prices,  State Administration of Grain said in a statement Nov. 19. State news agency Xinhua reported the next day that the cabinet ordered local governments to ensure food supplies ban toll collections for vehicles carrying fresh foods.

Bloomberg’s report from today’s early morning analysis above just makes it more obvious to see. All that has happened in state controlled China till now is that the growth dividend has resulted in a liquidity overhang doubling broad money and increasing money supply by 54%. As one of the european commentators on our much favored Insider from Reuters also said, all that money could easily be allowed to run off into offshore avenues for individual and state investment and even stashing away in overseas options as current foreign exchange controls may be maintained with the concurrent freedom to buy and sell foreign assets. That valve is going to be a simple and effective way to outrun the rapid churning of inf lationary currency in the domestic economy allowing Xi’s new leadership to show quicker results from domestic controls on foodgrain hoarding and local tolls etc to keep the first double digit inflation down to even less than 6-7% in line with an healthy 6-6.5% overall rate of inflation

With two policy making banks in PBOC and CBRC as also three sovereign investment vehicles, China has effectively harnessed global markets for more than a decade and as and when the local leadership feels comfortable with its currency in the global markets and the status of reform it would be able to return to the stable path of the 8% rate with a preferential position in the global capital markets. Local Chinese entrepreneurs have also shown a propensity to dabble in hot money and create quick hot pockets from the global stance of the Chinese leadership, so a fashioning of exit routes without concurrent graft or delivery failures coupled with overseas flows would make its peculiar brand of national hegemony with its own payment systems, and its indigenous utility processes in freight, transport or branded goods production would become trademark showcases for the global citizen that even now welcomes Chinese investment

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This entry was posted on November 23, 2010 by in Amitonomics, China, Financial Markets and tagged , , , , .

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