World on red alert over China's inflation
2 January 2011, by Malcolm Moore (The Telegraph)
China could be hit by inflation of 7% to 8% over the next two months, panicking Beijing's policy-makers into dramatically raising interest rates, economists have warned.
The prospect of at least four further interest rate rises in the world's second-largest economy is likely to alarm global markets, which tumbled in shock at China's decision to raise rates on Christmas Day.
However, inflation has become the central concern for the Communist Party, which is struggling to contain growing outrage in the People's Republic over rising prices.
"If you look at the sequential growth over the last two months, inflation is rising at double digits. In the very worst-case scenario, if Beijing does not take action, we could see double-digit inflation this year," said Yu Song, chief China economist at Goldman Sachs.
At stake is the future of the global economy, according to Andy Xie, the former China economist at Morgan Stanley. Writing in Caixin, a Chinese magazine, he said that the two most likely candidates to trigger the next financial crisis are either the US's sovereign debt or China's inflation.
"You can describe the global economy as a race between the US and China to see who goes down first," he wrote. "If China manages its inflation, the US will cause the next crisis. But if China suffers a hard landing, the US trade deficit might even halve because of lower import prices. That would boost the dollar's value. The US would have lower financing costs for its debt and could enjoy a period of good growth."
In food markets around Shanghai, the price of meat and vegetables has risen by at least 50% in the past year, sparking anger among poorer shoppers who spend up to half of their income on food.
In some parts of China, the price of basic foods has doubled and shoppers in the southern city of Shenzhen have even taken to skipping across the border to Hong Kong to buy their daily groceries. On the Chinese internet, the Chinese character "Zhang", which means "inflate", has been picked as the word of the year.