What Post-Stimulus Chinese Inflation Means for Your Investments

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Following the release of $585 billion into infrastructure investments, China’s economy has bounced back quicker and with more force than any other economy in the world.  However, with so much capital flooding the infrastructure sector and trickling into many others, inflation remains a consistent threat.

The Origin of Inflation

Much of the record high inflation numbers involves the impact of the stimulus and a continuously strong export economy, which brings in billions of dollars each and every month.  Though the Chinese government has been a long time saver, last year it decided to cease its savings and instead invest $585 billion or 12% of the GDP back into the economy.

Naturally, inflation has followed, as the amount of money coming into the country each month is spiraling back through the economy, and the banking system continues to leverage it upwards through fractional reserve banking.

Solutions Could Be the Problem

Consumer prices in mainland China continue to rise, even as the government is pushing banks to curtail lending.  Developers must now put up a 50% down payment on real estate, crushing any opportunity at a bubble and restricting lending and money supply growth.

However, spenders aren’t deterred by higher down payments, and capital is instead flowing into consumer goods and personal items, which are now inflating in price at the highest rate since China’s recession ended.  CPI calculations excluding factory prices are recording growth two-times that of regular CPI calculations.

The Safest Place in China

Photo Credit: Canada.com

For now at least, the safest investment place in China appears to be the infrastructure sector.  However, once the stimulus cash is removed from the system and projects come to a close, the economic outlook could shift quickly and violently back into recession.

Although the fundamentals of the export economy are just has healthy as they were pre-recession, they’re dwarfed by stimulus measures and make up only a portion of the current economic explosion.

Investors should be careful when approaching Chinese investments, as eventually the stimulus will pass, and a small, but still significant, recession could take hold until the cheap and easy credit is dispersed through the economy.

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