Over-Revving Revenues

According to the March 30^th Case-Shiller Index, the mid-tier price for a single family residence in Los Angeles/Orange County area ranged from $305,699 to $500,519. According to the April 17^th New York Times, the average selling price of a condominium in central Shanghai, China is over $500,000 (25 times the average earnings of a Shanghai resident). Somebody in China is making money! And economic growth in the Peoples Republic is a searing 9.7% per annum right now, far and away the biggest number among the globe's major economies. Kind of challenges your notion of poor Chinese peasants working for chump change, although there are hundreds of millions of people who fit that description more than the PRC would like to admit.

The story, of course, is what that overheated growth rate is doing to China and the world and what China feels about it. We can start with the latter concern and note that China's leadership sees inflation sending prices soaring, as the above housing statistic for Shanghai clearly indicates. Gasoline prices are up from $3.82/gallon in 2009 to $4.50 today. Their consumer price index has risen 5.4%, the biggest increase three years. Authorities are trying to push down the free flow of cash, a driver of inflation, by upping the amount of capital reserves that must be maintained by the nation's banks (to just over 20% of their cash holdings). The government is also trying to dictate the prices on some basic consumer commodities, while upping its agricultural subsidies to stabilize food costs.

Inflation is generally a bi-product of over-borrowing (leveraging), which in China has plagued both the local municipal and private construction marketplace because of loose lending practices, and until recently, relatively low down payments for real estate with concomitant higher borrowings to support development and purchase of commercial and residential structures. Private and municipal real estate-related debts have been exploding. The fear, of course, is that China would face the same kind of bubble that sank the real estate market in Europe and the United States, and that the relevant banks would find their balance sheets trashed as a result.

While China's massive cash reserves might protect that country from having to incur massive deficit borrowings, that use of her cash reserves would have to be pull from other needed development, particularly infrastructure, education and environmental concerns. Likewise, China would have a lot less money to spend on imports, which would be quite a body-slam to economies counting on selling their wares to and in the PRC.

Moving away from China's once lowly 1.8% annualized inflation to north of 5% per year would also have the effect of increasing prices for Chinese exports, and for people who now rely on such Chinese products and services, these cost increases would represent another body-slam to the trade imbalance between China and the West: That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere. In some cases, retailers are bidding for goods at prices the exporters consider too low. I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers, Dong Tao, an economist at Credit Suisse in Hong Kong said. "I've been covering the Chinese economy for a long time, and I've never heard that before". NY Times. China's leadership, acting without a central banking institution like the European Union's Central Bank or America's Federal Reserve, will probably continue to require greater capital reserves and increase interest rates, but the near-term prognosis is that China needs to do a whole lot more to get these price trends under control. If they don't, prepare to pay more and live with less.

I'm Peter Dekom, and no matter what we do with our economy, we are always impacted by other economies "over there".