On how China tries to curb increasing inflation with a dose of painful realism

We have been told that China Co. has been exporting deflation in consumer goods for years. However, as resources got scarcer and more and more expensive in dollar terms, inflation –the devil of the year- started kicking in and reaching unsustainable levels.

At the same time, countries with oil cap prices were killing their smaller and making survival extremely difficult to their major players.

I already commented on how oil subsidies where eating out on foreign reserves, creating emerging economies in oil-dependant nations à la USA. If anybody, China can afford subsidising its piping hot economy with its estimated 1 trillion US dollars foreign reserves pot. Just for fun, that is 1,000,000,000,000 or 12 zeros; don’t mistake it with the European trillion which is a million billions or otherwise known as 1.000.000.000.000.000.000.

Pointless facts aside, if anybody, China could have say something in the likes of “high oil prices? Bring them on!” After all, China’s developing machine was working on gasoline prices 40% below USA prices… and that is for a non-oil producer country. The other day I read of some American fellow who remembered when filling his car up would cost him $2… and now in Gordo, California a gallon goes for just above $6 per gallon, still a far cry from European prices.

But hey, look at what China just did, first kill off the small petrol stations who couldn’t survive after price caps. And now, taking advantage of a drop in monthly inflation and following India, Taiwan, Malaysia and Indonesia’s lead, the FT reports that:

[…] Beijing said that petrol and diesel would go up by to 18 per cent and electricity tariffs rose by just under 5 per cent.

That will slow demand in the short term (did you see the drop in the barrel price?), but if market dynamics is a good history teller, prices are due to increase in the Middle Kingdom (I just found out why the name, China is called ‘Zhongguo’ in Chinese), so they will attract more competition and therefore efficiencies in the retail, refining and logistics of petrol and diesel, potentially leading to long term lower prices.

I guess that the pathetic and desperate position the USA has put itself after relying completely in petrol and oil for the daily commute to work of over 150m workers (or so Mark J. Penn says on his Microtrends full of scaretistics), is not something that the Chinese are very keen on replicating in their country. As much as environmentalists hate it, China moves on coal, not oil. Let’s thank them for that.

However, as of today, Joe Chang will pay a massive 18% increase at the petrol pumps and 16% at the diesel ones… that means:

  Petrol litre US gallon
£ 0.401 1.518
$ 0.791 2.994
0.508 1.921

And translates into this:

 

Alright, I wish I were paying that at the pump, instead of the £1.189 I paid yesterday, but urban incomes in China now average about $1,000 a year so I understand the queues but I think it is a step in the right direction. Still, if urban dwellers make around £500 per year, how much do they make in rural China? Frightening.

We just need a Fed half as realistic as China’s command government, and raise interest rates to the sky, a Volker-like response. Painful in the short term, but I bet commodity prices will drop dramatically in dollar terms.

.Calvin

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