Meanwhile back in China - Price Freezes!

This was before my time but I believe the last person who tried price freezes in the US was President Nixon. That didn't work out too well.

Well, now China has decided inflation has gotten out of hand so it's time to go to the tried and true price freezes. Once again, we see free markets rule on the way up! But when they cause ill effects its time for regulation. Click on the label at the bottom of this post ('china market') for my earlier thoughts on how this is all coming together. And yes this has an impact on the US consumer, as when wages go up in China to pay for inflating goods, that means inputs to US companies buying Chinese product goes up which means US consumers have to pay more out of their pocket - and we already are facing an increasingly strapped US consumer without his house ATM. (not to mention the value of the dollar is deflating by the day)

While the China Shanghai market can go on this crusade upward on onward into bubble land indefinitely (just make sure you have a chair when the music stops), let's look at what's going on, on the ground.

• BEIJING: The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing's mounting concern over inflation.
• Beijing also stressed the importance of holding down market-driven prices during the forthcoming holiday period, saying it would have a direct impact on the country's "development, reform and stability."
• Ensuring stable prices would also create favorable conditions for the opening of the ruling Communist Party's five-yearly congress on Oct. 15, a statement issued by six ministries said.
• The government still administers a vast array of prices, including those for land, transport, utilities and fuel.
• The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August. <--- hear that? raise your wages....
• Chinese leaders are nervous that a rapid erosion of living standards could trigger social unrest, as it has before in China, most recently in the run-up to the pro-democracy demonstrations in Tiananmen Square in Beijing in 1989 that were put down by the army.
• The main source of inflation has been an increase in the price of pork, China's staple meat, caused by disease, rising feed grain costs and low prices last year, which deterred farmers from rearing more animals.
• Separately, China is set to provide more aid to dairy farmers as part of an effort to control rising food prices, which have driven consumer price inflation, industry officials said.
• They said the State Council, China's cabinet, was to meet Wednesday to discuss financial support for dairy farmers after increasing feed costs and low milk prices forced many to stop raising cows. "There has never been a meeting before of State Council leaders to discuss dairy cows," said an official with the China Dairy Association.

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China is and will continue to be one of the great growth stories of our lifetime. However, 10% GDP growth and massive movements of population from rural to urban cannot happen without dislocations, possibly severe ones. We are starting to see some of them. When all this starts to effect markets is anyone's guess; and the government will do everything in its power to keep up appearances up to 2008 summer olympics. Past that point, it's going to be dicey. This is a 20-30 year story but all growth stories have their speed bumps. Right now markets are not pricing in any.... food for thought. Wait, food is too expensive. Dairy for thought.... wait, that's too expensive too... ummmm, toys for thought? Never mind... bad idea.

Quick fact - statistics show those living in rural areas and the urban poor spend 1/3 of their money on food. No, these are not the daytraders pushing the Shanghia market to bubble status. These are the regular folk..... and the vast majority.