Inflation Causes Heart-burn

It seems not long ago when I first arrived in Beijing that Heineken was only a dollar and a crosstown taxi ride was nothing but chump change - now I only drink domestic beer and I take public transportation every day. Certainly, times have changed and so have the prices.

Is China overheating? I don't think so - no yet at least. But I do believe that the Chinese economy will see more volatility in the coming year. Inflation has soared for the past 6 months at rates the new economy is not used to. The rising prices in real estate has created such a bubble and that in the event of a burst, the effects would be far more detrimental than those felt by American home-owners this past summer. The price of pork (a staple meat in China) and eggs has continued to double and then triple, creating panic among China's low-income rural population. Just this past Saturday in Chongqing, people began lining up before dawn when a Carrefour store offered a discount on large jugs of cooking oil, an essential for a lot of Chinese cooking. When the doors opened, a stampede ensued, killing 3 people and injuring 31.

As farmland continues to disappear and Ministry of Health inspectors preventing the spread of disease wipe out hundreds of thousands of pigs and chickens (blue-ear disease and bird flu), China will have to come to terms with its rising food pricing, while the government tries to curb foreign investment, hike up interest rates and buy about 1 billion dollars in in foreign currency (mostly US dollars) a day.

Rising inflation, however, already has had some effects. China's banks pay a one-year savings rate of 3.87 percent - far less than the inflation rate - and some savers have withdrawn money from banks to buy real estate and invest in the stock market, which has almost doubled so far this year, despite a major correction recently.

Personally I am not worried about the rising food prices (even though I shop at Carrefour) - I'm more concerned about the prospect that the rising mass of savings in China's economy may soon boost housing and other costs, thus setting itself up for a hard landing that would ultimately shake the world's economy like never before.