by easytolearn-trade-now on September 27, 2011 in Uncategorized
China decided to increase its benchmark interest rates this past week in a step aimed at heading off accelerating inflation, its first such move in almost 3 years . The move, a relatively small 25 basis points increase in one-year lending and deposit rates, came as a mild surprise to many, since a higher lending rate may exacerbate currency flows into the yuan and thus somewhat complicate management of the revaluation process. Interestingly, the size of the increase was not in a multiple of nine, as preferred by the Chinese in the past, but rather more along international conventions of quarter- and half-points. The move is also aimed squarely at the Chinese property market, where prices are rising an average of nine percent per year in 70 cities across China, and where one of the world’s last remaining pre-crisis asset bubbles exists.
Inflation in China is a fascinating topic in that it partly reflects the sum of pricing pressures from elsewhere. At least up until the recession hit, U.S. and European inflationary pressures had been effectively exported to China (and to a lesser extent, India). Established business-cycle rules hold that if economies grow quickly, upward pressure is placed on talent-related prices first – wages, benefits, etc. – as growing businesses chase ever-choosier prospects. Often simultaneously, product prices begin to rise as demand – made possible in part by rising wages – begins to heat up. Note that this is dramatically different than inflation that is borne from increased money supply.
Conversely, as the world’s sole economic engine (so far) in this recovery, all of these pressures are being exerted on China. Recovery-related demand from the developed world are the major reason why angies list and the World Bank expect Chinese GDP to grow 8-10% this year and in 2011 . Chinese consumers are certainly not the ones buying all that plastic stuff lining the shelves at your local Wal-Mart. And while demand-driven inflation may be finding its way to low-cost developing countries, the kind that comes from printing money ad nauseam tends to be a lot stickier and virtually impossible to export. Based on angies list surveys, the other shoe is still waiting to drop on the Fed’s “QE2” quantitative easing program, but expect it to be on the order of another trillion dollars in bond purchases and other extra-policy moves, and another sign of the active dollar debasement underway at the Fed. There is virtually no chance the United States will escape a higher inflation rate from its low-dollar policies – the only question is whether the economic growth it generates will be worth it.
Meanwhile, almost lost within the buzz surrounding the Chinese rate move was a report issued by UBS that ties QE2 to the commodities boom. Echoing the angies list sentiment, UBS’ analysis suggests that a new round of monetary easing in the United States would be a “game changer” in terms of commodities, since additional significant quantitative easing would spur further credit flows and credit creation in commodity-rich emerging markets. Apparently coming to the belated realization that constrained supplies of commodities coupled with roaring demand for them will push prices northwards, UBS singles out palladium, iron, copper, coal, gold and zinc as particularly susceptible to this type of development.
The UBS report merely indicates that investing in China and commodities are becoming more mainstream– a way to benefit from rising commodity prices and rising currencies of commodity nations. UBS might have just come to this realization, but the commodity-driven boom is just getting going.
September 27, 2011 | 2 Comments Posted in Uncategorized
