China Faces Economic Double Whammy

Commentary

Inflation is about to hit China at a very inopportune time.

Inflation and specters of a U.S. Federal Reserve interest rate hike could present a double whammy on China’s economy as it struggles to come out of COVID-19 lockdowns.

Official National Bureau of Statistics (NBS) data showed Chinese factory-gate prices, or the cost at which wholesalers purchase from factories, increased 13.5 percent in October compared to a year ago. This is the fastest rise in China’s producer price index (PPI) since 1996. The index tracks purely the price of goods at “factory gates” and doesn’t include transportation or logistics costs, which are also rising.

The alarming figure was the result of a rise in other input prices, including that of coal, oil, steel, and electricity. Factory-gate inflation may have been exacerbated by an unexpected energy crunch over the past few months. In October, the Chinese Communist Party (CCP) ordered its mining companies to increase coal production and forced price cuts to lower energy costs.

That shouldn’t be a surprise to U.S. consumers already suffering from inflation. October consumer price index (CPI) in the United States rose 6.2 percent from 2020, the fastest year-over-year surge in 31 years.

In China, consumer prices haven’t risen to that degree, but it’s only a matter of time. Higher prices at China’s factory gates impact the whole world—everyone consumes Chinese goods—including China’s domestic consumers.

Chinese CPI was 1.5 percent higher in October. That’s the official figure, and we can be sure the CCP is closely managing these numbers. Runaway prices, especially on necessities such as food, are a sensitive topic for social stability. The official figures report that the nationwide cost of fresh vegetables jumped 16.6 percent in October, a huge red flag.

I raised the issue of stagflation in China almost two years ago, but today the risk of stagflation is much higher.

Stagflation is an economic state in which a country’s economy suffers from stagnant economic growth and rising inflation at the same time. This is especially tricky as the central bank cannot use its usual tool of raising interest rates to combat inflation without harming economic activity. The United States experienced this during the 1970s when an economic recession was met with an oil supply crisis.

China isn’t likely to report negative economic growth, at least not according to official NBS figures. But rising PPI means that much higher consumer prices are just around the corner.

But the CCP’s tools are limited in the near term. Due to ongoing power shortages, it can’t stimulate the economy efficiently, as there isn’t enough electricity generated to support higher activity. But without increasing power supply, China can’t increase economic growth. Already, some areas are seeing factories being shut to lower strain on the power grid.

Meanwhile, the U.S. Federal Reserve’s expectation of raising interest rates poses another threat to China’s economy.

The U.S. central bank has lowered monthly asset purchases (quantitative tightening) starting this month. In scaling back the Fed’s pandemic-driven economic stimulus, Fed Chairman Jerome Powell has laid the groundwork for the Fed to raise interest rates in mid-2022. But if U.S. inflation continues to worsen, Powell may be forced to act even sooner.

Few experts in the United States have chimed in on this impact, as the focus has been the domestic economy, but Citadel LLC founder and CEO Ken Griffin recently rang the warning bell. “China and the United States are very tightly integrated,” he said at the 2021 Caixin Summit in November.

“Any steps that take place in the United States to slow inflationary pressures will put pressure on global growth, hurting the economies of both countries.”

So far, U.S. consumer prices have outpaced Chinese prices, at least officially. A Federal Reserve move to tighten monetary policy in the U.S. will likely have a negative impact on China given that its economy is still struggling with COVID-19-related lockdowns and travel restrictions.

The expectation of monetary tightening in the U.S. will likely weaken China’s currency and force outflows from the world’s No. 2 economy. For an economy still struggling to find its footing, it’s an unwelcome development.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.

In the 1930’s, Germany was suffering mightily due to the sanctions imposed on her from the Treaty of Versailles. In stepped Adolf Hitler and played on that to get control of Germany and start his Fascist dictatorship and take control of Europe.
Japan started its expansion in Asia and Southeast Asia to expand its territory and secure oil fields. The economic hardships they suffered caused them to invade other countries for the natural resources and valuable possessions that they owned, and both countries did it by building up their militaries and violently taking them over. Japan had a great start in trying to destroy our navy and gain control of the Pacific.
I know everyone knows this, but my pinpoint is that if China suffers enough economic hardship, even as big as that country is, it won’t hesitate to attempt to take Taiwan, especially now that the U.S. is weakened militarily and politically. The CCP has been stealing and buying our secrets for a long time. Add to our weaknesses the fact that China has operatives, lots of them in this country in sensitive positions, I can only imagine what they have planned for us.
I don’t think they will be as quick to take credit for hostile action against us like the Muslim radicals, but they will do something.

The argument was natural resources. Try and keep up. ... China should think twice
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Insults do not look good, unless you are trolling which is worse.

Your argument about natural resources is a false one ; China craves the Formosa foundries like a man in the desert craves H2O. The crave total control over the South China Sea and all waters and lands from South Korea to Australia. The want to make the Pacific their pond.

Other than that, you seem to have no clue how the CCP or even mainland Chinese people think.

The CCP above all else want to continue to exist. Remaining in power is a given, and the destruction of the dam means only all out nuclear war. The dam’s destruction would not end China as a country. Period.

You imply Taiwan has nuclear capability - they do not. And the US would never be so foolish as to do that either - it serves no military utility and only aggravates the situation, contributing to a war no one wins. Thermonuclear war with China would see most of the US destroyed and millions, if not the bulk of our population, dead. Because of its huge population China would go on, while the US would be a dead wasteland.

China will not invade Taiwan. Not ever. That’s not how they roll - read the Art of War. They do not need to invade, control is sufficient.

PS : China does not “think”, its not the Chinese people, its the CCP - over which no ordinary Chinese person can effect change.

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