Source:
CNNMoneyOne of the most popular debates in global macro circles currently relates to China and whether its economy is in a bubble. On the side of the bubble callers is one of the more successful short sellers of our generation, James Chanos. Admittedly, Chanos is usually on the right side of these big calls and, for the time being, I'm not going to debate him. Great Chinese bubble debate aside for now, how does Chanos's theory hold up in light of the data we've been reviewing?
Data from various sources within China that we've seen over the past few weeks has pointed us directly toward one simple conclusion: China is experiencing serious inflation.
* * *
As of now, the Chinese economy is signaling the need for more aggressive tightening based on the points above. But there is also the reality of negative real interest rates. Currently, the consumer price index is outpacing the one-year interest rate on savings of 2.25%, meaning the Chinese have no incentive to save any money. The two policies needed to offset inflation are an increase in interest rates and an upward revaluation of the Yuan. Both actions would help slow Chinese growth and commodity demand further in the coming months.
What worries Chinese economic planners considering these fixes is that rather than just slow down and control growth, they have the potential of "popping" the bubble, making Jim Chanos a happy man but also causing serious damage to China's export heavy economy. China would like to have it both ways right now: rapid growth and wealth creation, but also the safety of a properly valued, non-inflationary economy. That's a tough task: nearly every time we've seen this movie before, the ending is the same.
Read more:
http://money.cnn.com/2010/05/19/news/international/china.inflation.fortune/