Inflation in China: a looming threat

Two reporters called me in the past three weeks to see if companies I work with will discuss how they feel inflation in China is going to affect their business. It is here, and I think it’s going to be the big word of 2008, just as “sub-prime” was the big word of 2007 (at least in the US).

One of my client-friends was telling me a few weeks ago how he and his wife had budgeted 100 to 150 RMB a week for food for themselves and their infant son. Now his wife is spending more than 200 RMB. It’s when I talk with people like this that I remember that not everyone has RMB to burn on Da Dong dinners and iPhones. This is a white-collar worker with a degree who has studied in the US.

Another friend of mine moved out of Beijing more than a year ago and now wants to move back, but he is shocked at the increase in rent. Of course, that’s more the Olympics than ordinary inflation, but many here seem to feel property prices will remain high even after the crowds go home in late August. This friend is also white-collar, and I truly feel for him. What is a scarcely noticeable up-tick in prices to me is a catastrophe for him.

With this in mind, I enjoyed this post about the fear of inflation and the tendency of the Chinese people to value cash over everything else. This mindset has served China well in the recent past, but it could spell a lot of disappointment in the future.

While China was very poor in the fifties, sixties and seventies, there was virtually no inflation.

Today in China, we are seeing the early signs of inflation again in food prices and property prices. For any Chinese government, and this government is no exception, inflation is the greatest single and most frightening enemy it faces. It may creep up slowly, but it unleashes forces which can easily spin out of control.

If a government cannot maintain the value of its currency, it cannot protect its citizens, and the people end up in the poor house. It’s that simple.

This is why the Chinese government will not easily revalue the yuan upwards, and why the government keeps such a tight control on credit.

One of the upsides for Chinese businesses investing in Africa is that although the people are poor, at least they pay cash. When times turn hard, you want to be paid in cash.

For most Chinese, you aren’t rich unless you own cash.

Credit is just a derivative and in tough times, no one wants derivatives.

The same blogger – one of the smartest out there – thinks there might be better places to put one’s money.

The Discussion: 13 Comments

A lot of folks believe that one of the biggest triggers of Six Four was inflation.

People will put up with a lot, but only if they have the expectation that things are going to get better for them.

Me, I’m planning on getting my little piece of land in the redwoods and living in a yurt in about two years…

Or in China. Haven’t quite decided yet.

February 3, 2008 @ 4:54 pm | Comment

Something does not make sense in this post. Letting RMB appreciate fights inflation. Stronger RMB lowers the cost of imported food, energy and raw materials, and hence reduces inflation.This is one reason why we are seeing RMB moving up steadily this year. I expect sometime this summer RMB will break the 7 to 1 psychological rate. Too bad RMB can not be traded easily, unless one lives in Hong Kong.

PS: My first post here.

February 4, 2008 @ 9:46 am | Comment

You know, I think economists don’t really worry too much inflations as long as is not hyper- or stagflated.

Personally, I prefer a higher inflation figure for China so it could eventually catch up to the rest of the world in purchasing power. However, that’s only if that it does not come at a high social cost i.e. unreasonable increase in social inequality.

Oh, I think Jim Rogers is right since is the hella richer than the blogger. Btw, Rogers daughter does not have a first language. She is multi-lingual at birth. You are still in the past if you still think one language is enough.

February 4, 2008 @ 11:39 am | Comment

Good point, Serve. I’ve always said I was happy to be paid in RMB – but that was mostly before inflation became such a big issue. I’d definitely prefer RMB to dollars (duh), but commodities and gold are even better. Maybe my company will agree to pay me in krugerands…

February 4, 2008 @ 12:02 pm | Comment

Inflation is the price of development and demand, learn to love the suck.

February 4, 2008 @ 2:17 pm | Comment

redwoods and living in a yurt in about two years…
Posted by: otherlisa at February 3, 2008 04:54 PM

sounds really good. Heard in Oregon there ‘s an ashram where everybody gets 8 bucks an hour no matter what the job is. Back to nature, the way humans is meant to live. Do you happen to know the name of this Hippie community?

February 4, 2008 @ 5:16 pm | Comment

The original author makes a few interesting points, but comes across as mostly naive. (Africa pays you in cash? Pray tell, what international customer does *not* pay in “cash”..? And his grasp of the importance of Chinese history seems.. off.)

But back to the important topic.

China has battled double-digit inflation on/off over the past 3 decades, so there’s nothing new about what we’re facing today.

China handled it poorly in the ’80s (many believing it was a primary factor behind 6/4), and handled it much better in the ’90s. There were many very intelligent people who predicted hyper-inflation for China back in 2003-2004 as well (most notably Andy Xie formerly of Morgan Stanley)… but it didn’t happen.

Will it happen this time? I don’t have a crystal ball. It’s like driving a race car on a tight track; you have no way of knowing if you’ll make the corner, or you’ll spin out.

February 5, 2008 @ 1:15 am | Comment

youguys, I have in mind a rather luxurious yurt with full plumbing and electricity. You can buy them at Pacific Yurts.

I’m not really a hippie type, to be honest…

February 5, 2008 @ 1:30 am | Comment

Thanks Lisa for the Pacific Yurts link.

“Something does not make sense in this post. Letting RMB appreciate fights inflation. Stronger RMB lowers the cost …”


I thought the same, so…????

February 5, 2008 @ 9:51 am | Comment


The post said that the Chinese government would not easily revalue the yuan upwards. My point is that the government has compelling reasons to let RMB rise. It is current moving up at a rate which is more than 10 percent per year, a rather fast pace in my opinion.

In the late eighties the RMB was considered overvalued, so the government could not play with the exchange rate to fight inflation. Shortly after Tiananmen, the government had to significantly devalue the RMB.

Getting paid in RMB is good only if you can save a lot, invest in RMB assets and convert your gains to USD at some point. If Richard chooses to spend all his income in Shanlitun, then nothing matters.

February 5, 2008 @ 10:56 am | Comment

“invest in RMB assets and convert your gains to USD at some point.”

Thanks Serve,
But why USD ? Isn’t it better & surer with Euros, and Gold, or buy properties & invest in businesses in China’s new SEZs: Sichuan, ChongQing, or overseas like Vietnam, Cambodia etc ?

February 5, 2008 @ 11:59 am | Comment

2008 has certainly started with a bang! The future was rosy on 31 December 2007, but suddenly everyone is buying candles and researching property in Perth!

A combination of recession in the USA, global equity market negativity, high interest rates, the National Credit Act and power outages have combined to create the perfect storm.

But don’t panic!

This is not the first time there’s been doom and gloom. Every few years the same thing happens. We experience massive economic growth, everyone is optimistic and buying holiday homes, and Merc’s. The positivity gets ahead of itself and the economy overheats, and then panic sets in because the economy seems to be collapsing when in actual fact it’s simply making an adjustment back to a reasonable level.

It happened in happened in 1998 when interest rates rose and you couldn’t give away your apartments, and it happened in 2001 when allegedly an fairly unstable guy by the name of Osama allegedly arranged for 2 Boeings to fly into the tallest buildings in New York!

On each of those occasions everyone thought it was the end of the world and that there was no light in sight. And on each occasion, believe it or not, the world did not actually end, it recovered and in fact things continued to get better.

Perhaps 2008 will be a tough year, but I also see it as a great opportunity to seize the day whilst everyone else is whinging and get a front-seat on the inevitable boom that we’ll experience in 2009, 2010 and beyond.

Make sure you make a mental note of everything that is happening now, because it will happen again and again, and if you don’t recognize the symptoms you’ll be suckered into the same negativity, and forget to look for the opportunities.

It’s easy to be negative. Subconsciously, you WANT to be negative! Whenever you open the papers they tell you about the goriest hi-jacking and the most corrupt politicians. Why don’t they dedicate more pages to the fact that Joburg is the world’s biggest man-made forest, or to the corruption-free achievements of the vast majority of public officials? Because bad news sells. Good news is boring.

The growth in India and China will continue to accelerate. South Africa still possess a huge chunk of the world’s resources, i.e.: gold, platinum, coal, iron. India and China sign 10mil new mobile customers every month. The Internet has and will continue to change the world. The enormity of its impact is up there with the wheel, electricity, TV, & telephones. Not only does the internet open up an entirely untapped world of commerce, but it is also the ultimate dissiminator of information and news. Apartheid would not have lasted 40 years if the Internet had existed! And you’re part of it!

I’m looking forward to another year. I’m looking forward to having fun and making memories.


February 5, 2008 @ 9:35 pm | Comment


After you ride the Chinese markets for a while, there will be a time for correction. After you decide to cash in, you’ll have to park your capital somewhere. Things are like Euro, Gold, and real estate in China will be likely as overvalued as RMB. But the dollar assets at that time will probably still be much cheaper, so you can shift to invest in the US markets.

February 6, 2008 @ 8:20 am | Comment

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