Will Inflation Collapse the Chinese Economy?

A growing concern for the global economy is inflation.

We’ve recently detailed this issue for the US economy earlier this week.

Global Central Banks, concerned with a potential deflationary collapse, have allowed inflation to seep into the financial system. In developed nations like the US, this puts a squeeze on consumers. But in emerging markets like China, inflation is outright disastrous.

Nearly 40% of China lives off of $2 a day. Your average college graduate in China makes just $2,500 per year. In an economy such as this, a rise in prices in costs of living can be devastating for the population.

Why are we not seeing this in the Chinese stock market?

In China, the banking monetary mechanism tends to funnel cash directly into the economy, rather than stocks (note that bank lending remains anemic in the US, while the stock market roars higher).

Indeed, China’s shadow banking (financial transactions outside of formal banks) has expanded to over 200% of China’s GDP or well north of $18 trillion in dollar terms.

This situation favors the well-connected Chinese political elite and lends itself to corruption on an epic scale.

Consider the following:

1)   In 2010 alone, 146,000 cases of corruption were launched in China (that’s 400 PER DAY).

2)   Between 1995 and 2008, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.

3)   It’s believed that $100 billion in corrupt money fled China through Government officials in 2012 alone.

Corrupt officials favor real estate as a means of acquiring assets because they can put properties in relatives’ names. Between this and the fact that stock investing has yet to become a cultural phenomenon in China as it is in the US, China’s stock market has languished while its real estate market has boomed.

However, the fact that so much “funny money” has moved into the Chinese economy via so many shadowy conduits makes the Chinese economy a potential inflationary nightmare.

The “official” Chinese inflation data won’t show this, but you can see the clear signs:

1)   Wage protests have become commonplace in China (a clear sign that the cost of living has outpaced wage growth).

2)   Wage increases have grown to the point than numerous US factories have begun moving their manufacturing bases back to the US (the profit differential is no longer big enough that it’s worth the expenses in shipping).

3)   China’s Government has made an official show of clamping down on inflation.

Inflation is already present in the financial system. The signs are there if you know where to look. The question now is how the markets will adjust as it spreads.

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Best Regards

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