CHINA’S influence on the global economy is being felt in numerous ways and this appears likely to continue for the foreseeable future.
One particularly positive effect over the past 20 years was the dis-inflationary impact of exports from China – and indeed from other emerging markets – on the developed world.
Chinese exports stayed competitively priced thanks to productivity gains offsetting wage growth and also as a result of commodity prices remaining low.
This in turn meant that major elements of Western consumer price inflation baskets – for example clothing – saw prices fall in real and sometimes absolute terms.
This benign situation for the developed world changed in the middle of the last decade owing to heavy Chinese investment in infrastructure, along with the rapid development of a buoyant urban consumer society, which led to increased demand for commodities and rising global commodity prices.
Following the brief hiatus of the financial crisis, the impact of China’s rapid economic growth on global commodity prices has resumed and was a major contributor to the 30% increase in food prices and 40% increase in the oil price over the past year.
Wage inflation has also been growing rapidly (21% to 22% over the past six months) as workers’ influence grows and as the shift from rural areas to cities has started to slow.
Inflation is now a major concern in China and the extent of the problem is clouded by the apparent attempt by the authorities to manipulate the reported data.
In January, the Chinese National Bureau of Statistics changed the composition of its consumer price inflation basket, reducing the weighting of food (to about 30%) and increasing the weighting of housing.
While a revision in the food weighting is partially justified by the fact that rising incomes mean that a lower proportion of consumption is taken up by necessities such as food, the precise timing of this revision is significant as it had the effect of reducing reported inflation.
The increased weighting of housing could also make reported inflation appear lower, if the Chinese authorities are successful in their attempts to get rampant house price inflation down.
Despite four interest rate rises since October, Chinese inflation remains elevated and the annual rate of consumer price inflation, according to official figures, rose to 5.4% in March.
We are of the opinion that the Chinese authorities will do whatever it takes to get inflation under control over the long term, as not to do so would lead to significant popular discontent that could threaten the government’s stability.
However, in the near term there remains scope for upside inflation surprises, which would feed through to global inflation levels and encourage interest rate tightening in developed countries.
Were China to allow the Yuan to appreciate against the American dollar, this would help to alleviate domestic Chinese inflationary pressure. In any eventuality it seems clear that China is more likely to be a source of inflationary, rather then dis-inflationary, pressure on the West in the future.
