Sometimes you have to look at the small stuff to understand the complexity of economic growth. My latest trip to China was eye opening. The cost of everyday items, such as the price of fruit has risen significantly this year – by all accounts some 31% in the past 12 months (consumer prices were up 5% in the year to March). With economic growth of 9.7% the Chinese government is in an epic battle to rein in inflationary pressures, pressures that are having an effect on the wallets of the Chinese.
China has raised interest rates four times and banks’ reserve requirements seven times since October 2010, when it declared it would make fighting inflation a priority.
A further implication for unchecked Chinese inflation is in trade.
US-China trade has risen exponentially over the past thirty years – from $2 billion in 1980 to around £460 billion in 2010. This has culminated in a record US trade deficit estimated at $273 billion in 2010.
The basics are simple – China’s large population and booming economy have made it a large and growing market for US exporters. In turn, the US imports low cost goods from China.
High inflation in China poses a significant threat to China’s status as the low-cost production centre of the world, with many US firms depending on China operations for growth.
Wages are surging particularly among foreign invested firms in coastal regions, which is leading to some firms questioning whether they can continue to operate profitably in China or seek a move to a lower-wage country. This is exacerbated by a decline in surplus labour which has led to firms paying staff more money to remain competitive.
Inflation will always be of concern to any government, but it seems China has some major battles to win, and fast if it is to remain a powerhouse of world manufacturing.