China Battles High Inflation

China continues to face surging inflationary pressures despite higher interest rates and loan tightening. The country’s Consumer Price Index (CPI), excluding food, came in at 4.9% in February, which continues to be way too high. As such, China increased its key interest rates for the fourth time since October 2010. I view this as a positive move for the longer-term based on simple economic analysis that higher rates are needed to control runaway prices. The last thing you want is for prices in China to ratchet up at a rapid rate, as it would be detrimental to the economy and would place enormous pressure on the poorer citizens.  China continues to face surging inflationary pressures despite higher interest rates and loan tightening. The country’s Consumer Price Index (CPI), excluding food, came in at 4.9% in February, which continues to be way too high. As such, China increased its key interest rates for the fourth time since October 2010. I view this as a positive move for the longer-term based on simple economic analysis that higher rates are needed to control runaway prices. The last thing you want is for prices in China to ratchet up at a rapid rate, as it would be detrimental to the economy and would place enormous pressure on the poorer citizens.

I expect interest rates will continue to ratchet higher over the next few quarters in order to rein in the inflation. The Chinese government is already placing a cap on certain food products and subsidizing some of the poorer rural workers.

China’s premier Wen Jiabao said that the government would focus on inflation and property values. Chinese inflation is a real potential threat to growth and stability not only in China, but also globally, for its trading partners. We could see higher-cost Chinese-made goods as prices rise and this will drive up Chinese-made goods sold in the United States.

At these levels, China’s inflation is a problem that needs to be rectified The average inflation rate in China from 1994 to 2010 was 4.25%,so there needs to be some work done here to relieve the inflationary pressures.

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Overall, China is on the right path towards developing into a rising world economic power, as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. The reality is that, if it is saleable and in demand, you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the United States.

For 2011 and 2012, China’s real Gross Domestic Product is estimated to slow marginally to 9.7% in each year, down from over 10% in 2010, according to the Organization for Economic Co-operation and Development (OECD). Economic growth in the Asia-Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in China’s neighbor, India.

Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to stay its course and tackle inflation, as rising prices will hurt the majority of the 1.3 billion people living in China who are trying to just get by on a daily basis.