Chinese inflation is getting out of hand and the repercussions for the global economy may not be pretty.
As reported May 12 by the Associated Press, Chinese inflation rebounded in April to 8.5% on a year-over-year basis, just shy of the 12-year high of 8.7% established earlier this year. In recognition of the inflation peril, the Chinese central bank this week boosted bank reserve requirements by 50 basis points to a record high of 16.5%, promising more hikes along with interest rate increases.
Sooner or later, China will succeed in bringing its galloping inflation problem under control. But it has built up so much momentum that stopping it will probably require a substantial contraction in the Chinese economy just like it did in the U.S. and Canada during the 1970s. Developed economies learned the value of a price-stability target from that era; China and the emerging economies appear to still be on the learning curve in that department.
A contraction in China will likely add another squeeze on the global economy on top of the credit crunch and sky-high prices for energy and other commodities. One casualty could be the current commodity boom itself. And as substantial appreciation in the Chinese Yuan would seem to be a virtual certainty, companies benefiting from importing cheap products from China, particularly Wal-Mart, could face more of challenge.