According To Soros, China Is A Bear Story

Unfortunately, even in spite of the continuing hype of “China this” and “China that,” you’ve pretty much missed the boat if you haven’t already gotten on board.  At least, that’s what billionaire George Soros believes.  In a recent speech in Norway, Mr. Soros said that there is mounting evidence which shows that the government there does not have good control of their economy and that inflationary pressures are having more of an impact than had been expected.  He points out that there’s a danger that the Beijing government could lose control completely.

Clearly, the Chinese central bank’s various attempts to rein in inflation in the overheated economy have been valiant, though with little enduring effect.  Just last week, the People’s Bank of China pulled out one of their inflation fighting weapons and raised banks’ reserve requirements by 50 basis points, the 6th such time the central bank has done that this year.

The government may have had no choice; in April, China’s annual inflation rate declined by 0.10%, which some market players saw as evidence of Beijing’s policy finally beginning to work.  But May’s inflation data shows a rise of 0.20% which effectively negated April’s improvement.  Some analysts believe that the June data is likely to show an increase in the CPI to 6%, well above May’s 5.5%.  According to one economist, the real problem with China’s inflation is that it’s more a reflection of the rapid rise in wages than in the rise in food prices.

Economists point out, if that is the situation, if wage increases are driving inflation, then it’s because consumers’ inflationary expectations are growing and they’re demanding higher wages now.  Such a scenario could actually drive prices higher as a result of the increased labor costs to produce them.  The outcome would be a vicious cycle of wage increases leading to price increases leading again to wage increases.  As Mr. Soros puts it, if such an inflationary spiral is allowed to occur, the Beijing government could find that an economic meltdown is looming.