Source: The New York Times                     Date: 27 April, 2011

As the United States and Europe struggle to get their economies rolling again, China is having the opposite problem: figuring out how to keep its revved-up growth engine from generating runaway inflation. Because China is now the world’s second largest economy, after the United States, and because the country has been a leading source of global growth during the last two years, money problems there can reverberate from Wal-Mart to Wall Street and the world beyond.

High inflation endangers China’s status as the low-cost workshop for the world. And if the government’s efforts to fight inflation cause the economy to stumble, that will cloud the outlook for international businesses — whether multinationals like General Electric or copper miners in Chile — that have been counting on China for growth. Inside China, inflation also poses a threat to social stability, a particular worry for Beijing, especially since authoritarian governments in North Africa and the Middle East have become the focus of popular uprisings.

The loose monetary policy, and big investments in local government projects, did revive economic growth. But even at the time there were already concerns about soaring property prices, undisciplined bank lending and the huge debts being amassed by local governments. The fear among some experts is that the bubble will eventually burst, leading to a wave of nonperforming loans at the big state-owned Chinese banks, which have been the main financiers of the nation’s phenomenal growth dating to the economic reforms in the 1980s.

Some economists have begun to argue that high inflation may be around for some time. Here again, the tug of war is evident.


“China is moving into a new era, a new norm,” said an investment analyst in Hong Kong. “In the previous decade, inflation was about 1.8 percent a year; in the next decade, it may be closer to 5 percent.”

The implications of such a shift are huge, not just for domestic consumers but perhaps even more so for exports. As wages and production costs rise, coastal factories are demanding higher prices for the goods they ship overseas. That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere. In some cases, retailers are bidding for goods at prices the exporters consider too low.

“I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers,” the analyst said. “I’ve been covering the Chinese economy for a long time, and I’ve never heard that before.”