Monday, June 2, 2008

Bloomberg: China Leads Asia in Retreat from Inflation Battle

China remains the inflection point of almost every major bull market at this point; thus we must monitor this Ferrari going at 165 mph down a careening oil slick mountain road. Recall, we are already seeing smaller Asian governments buckle under the global commodity price boom [May 23: Smaller Asian Countries Begin to Buckle Under Oil] and we are seeing the impact of steel [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects] Just speaking from a local perspective the impact on automotive of this steel issue is simply untenable. Hot rolled steel prices have risen from $830 metric ton in April to $1035 in mid May. Folks, thats in 6 weeks; this product was $500 a few years ago (and $150-$200 a few years in the early part of the decade). This industry has paper thin margins in the US as it is... a lot more pain for the Michigan, Ohio, and Indiana area. No subsidies here; just in China.

Bloomberg is out with an excellent article - some very solid pieces from them of late.
  • Plummeting currencies did in the first Asian economic miracle. The second may fall victim to surging inflation.
  • Central banks from Beijing to Bangkok are losing their bets that a global slowdown would temper price increases. While export demand from the U.S. and Europe may have eased, it has been replaced by rising domestic consumption that has helped push inflation rates in Asia as high as 26 percent.
  • The result: In China, Thailand, the Philippines and at least eight other Asian economies, benchmark borrowing costs are lower than the rate of inflation, resulting in negative real interest rates, according to data compiled by Bloomberg. The risk is that prices will spiral even faster, leading to overheated economies and an eventual bust. (hey, same situation here - print Ben print, just imagine how negative they would be if inflation was actually reported with some accuracy)
  • ``Unless there are concrete measures to tackle inflation, investors are going to reconsider the Asian growth story and realize it's not as rosy as it seems,'' says Sailesh Jha, an economist with Barclays Plc in Singapore. ``Confidence will weaken, and there'll be a significant correction in asset prices such as stocks as capital flows out.''
  • The People's Bank of China, which announced in early December a planned shift to a ``tight'' monetary policy, has kept its main lending rate unchanged at 7.47 percent since the end of 2007, even as inflation soared to 8.5 percent, near a 12- year high.
  • Without stronger action by the central bank, ``the eventual correction will come at a much higher price,'' says Kevin Lai, senior economist with Daiwa Research Institute in Hong Kong. ``The more the problems get delayed, the greater the risk. The subsequent bust cycle will be long and painful.'' (sounds vaguely familiar)
  • ``Policy makers were expecting slower global growth to bring down inflation and do their work for them,'' says Robert Prior Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. ``That's not going to happen. Monetary policy is incredibly loose, and they have a lot of catching up to do.''
  • Bank lending climbed 14.7 percent in Vietnam during the first four months of 2008 after a 50 percent increase last year, and rose 24.4 percent in Singapore in April compared with a year earlier. China's factory and property spending gained 25.7 percent in the four months through April.
  • In Russia, the central bank's two rate increases this year have failed to damp consumer prices, which were up 14.3 percent in April from a year earlier, the fastest acceleration in five years.
The World of Shortages theory continues to wreck havoc under the surface. Eventually someone will need to pay the piper.

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