China dances a fine line

China’s struggle to quell rampant inflation will be one of the most important influences on the world and Australian economies in the coming year. The recovery in the world economy – given the weighting given to the massive economies of the US, Europe and Japan – is fluttering as the effects of inflation and the debt burdens post GFC stifle the ability of governments to deliver more meaningful priming of economic growth.

Those economies matter in the world scene, but it is the stability of strong growth in China at present that matters most to the flows of money coming into the Australian economy, and the value of our currency.

China's inflation hit a 32-month high last month of 5.7%. So far the interest rate hikes and other measures have failed to temper the rising costs of living. Food inflation has been one of the worst hot spots – much of which has been created by China’s own practices of affecting world prices, but drought has been a contributor. Some recent relief has been seen in vegetable prices – such a crucial food group to the Chinese – which have plummeted due to early warm weather creating a glut.

The Chinese leader Wen Jiabao said recently that his government is learning a lot about inflation, calling it “a tiger that once set free is very difficult to put back in its cage”. The official word from his administration is that inflation will start to fall in late 2011, but it will be tough to steer a speeding engine as big as China’s economy back into low-inflation territory.

The government in that country has no doubt been watching the developments in Northern Africa and the Middle East which had their origins in protests against rising costs of living. It has no doubt also been working overtime to keep the internet shields up to prevent its citizens from watching how others bring change from decades of autocratic leadership.

It is likely that the regionalised fabric of the Chinese landscape sees a large number of small localised protests on a weekly basis, as costs of living escalate beyond the reach of industrial workers. Those types of disputes are generally dealt with where they flare up. But the episode of Shanghai’s transport workers – mostly truck drivers – however got the attention of the national government, as it broke through the heavy censorship of news that may undermine the position of the government. The truckers lost patience with inflation in the form of the rising port fees and fuel costs that are eroding their ability to make a living. Fearing a spread of the problem, the government brought a quick fix – cancelling the offending fees and subsidising fuel costs.

This may get them off the hook but while it deals with such pressures like putting out spot fires, it has to also steer its fast-growing juggernaut into calmer waters. The curbs it will place on capital flows to calm inflation will be all-important for its continuing development binge. Any hint that China’s price controls will quell demand for commodities that keep our mining industries in clover will set the hares running. Watch the $A crash back to normality and take the pressure of many affected sectors of the Australian economy when that happens!