By: Dr. Mike Campbell

Now the world’s second largest economy behind the USA, China is having to contend with (relatively) high inflation and a potential property bubble. Inflation figures released recently show that the consumer price index (CPI) measure stood at 5.5% in May. This is the highest value seen for CPI in the past 34 months. This has happened despite the best efforts of the Communist government to rein-in inflation.

Probably more troubling than the CPI figure is the rise in food prices which have risen by 11.7% since the wealth that China has created has not fed down to the man on the street. Food and commodity prices have been rising on international markets and analysts expect the cost of living in China to rise further. The matter has already become a hot political topic in The People’s Republic; despite taking a role on the global economic stage, the philosophy of the State officially remains opposed to the capitalist ways of the rest of the world. There is an obvious elephant in the room.

The government has set a target of 4% for the CPI figure for the whole year which looks to be increasingly ambitious. The central bank has used interest rate increases as a method to control inflation, with four rate hikes since October, but has clearly had only limited success. Further rises are likely.

In an attempt to head off a rapidly inflating property bubble, Chinese authorities have already raised the liquidity requirements for banks several times. The idea is that by requiring banks to maintain a higher proportion of their assets in liquid form, the money supply for speculative property purchases will be choked off. In tandem with higher inflation rates, the intention is that property prices will stabilise, thereby preventing the property bubble from bursting as happened in Ireland at the height of the global financial crisis.