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The Causes of China Inflation and Its Effects

Updated on July 21, 2011

The China Economy & the Rest of the World

This page will focus on the causes and effects of inflation on China. China is fast becoming a key economic power.

This makes understanding the country's future inflation rate trends all the more important.

Please go ahead and learn more from the list of historical and current inflation rates, facts and news articles.

Books on China and Inflation

Causes of Inflation in China

There are a few key factors that will continue to drive China's pace of inflation.

The more obvious culprit is the Chinese governments strict currency control that had artificially depreciated the foreign exchange rate of the Yuan. The cheaper Chinese currency was one of the contributing factors to a strong manufacturing and export business activity. But it also has its downside by making any imported food and energy resources more expensive.

China's unprecedented rate of development have contributed to a strong demand pull inflation. Rampant consumerism coupled with a large growing population will continue to drive the increase in consumer demand. This consumer led demand in turn cause a corresponding increase in business activities and ultimately production cost.

There is also the expectation of future economic development and potential appreciation of the Chinese Yuan (also known as Ren Min Bi, RMB). This has led to huge inflows of both hot money and legitimate long term investments into the China economy. The side effect are pockets of assets bubbles forming in the China property market especially in the first tier cities like Shanghai and Beijing.

In our highly interconnected world economies, the key to understanding the causes of inflation is to look at exchange rates, resource distributions across the different countries. The pattern of imports and exports will also play a key role in affecting each nations future currency strategy.

China Inflation Related Developments

Here are some interesting events that will shape the People Republic of China's economy.

China is starting to selectively clamp down on speculative activities in the real estate and overheating of the banking activities. In this the government treads a fine line between doing too little with no positive effect or doing too much and causing a crash.

On the social  front, there have been some rumblings of social unrest in some China cities. This should spur the government to be proactive in their fight against inflation. Being a large country it remains if these are isolated incidents or a sign of bigger social problems to come.

The Yuan currency have been allowed to appreciate slowly for the most part of 2010 and was still going strong in 2011. This is one sure way for China to effect of "imported" inflation with a stronger currency. Ironically, an expectation of currency appreciated can encourage more demand for Yuan denominated assets. This stronger demand might in turn stroke asset price pressures.

Learn about World Trade Shapes the Global Economy

China's Major Trade Partners

International trade can and do affect inflation rates in China. As an example, if China's largest import partner Japan appreciates its currency then the price in yuan essential imports into China will rise. Of course China can also choose to import less of non-essential items. 

Based on 2010 figures, the total value of international trade of China was $2.115 billion.

From 2010 figures, China's total imports are valued at $921.5 billion. Its imports consists of 13.3% from Japan, 9.9% from South Korea, 9,2% from Taiwan, 7.2% from the US and 4.9% from  Germany.

China's major export trade partners consist of the United States, Japan, South Korea, Taiwan, and Germany. Based on 2010 figures, China exports 17.7% to the US, 13.3% to Hong Kong, 8.1% to Japan, 5.2% to South Korea and 4.1% to Germany.

Its main exports are minerals like tungsten,tungsten, antimony, tin, magnesium, molybdenum, mercury, manganese, barite, and salt. It is the second largest producer of salt after the US. It is also one of the largest producers of aluminum.

Of particular importance is China's production and export control of rare earth elements. Rare earths are vital in the production of high tech goods from solar panels, next generation battery system and certain electronic systems.

China's Shadowy Financial World & its Effects on Inflation

One of the key causes of inflation is the monetary supply. In the case of China, the heavy handed curbs on credit expansion have created a host of grey-market institutions and in some cases black market operations.

Some analyst suggest that only half of total credit financing comes from the heavily regulated banks that loans money mainly to state controlled or affiliated firms. This suggest that up to half of all financing is coming from a range of trust  & finance companies, leasing companies and underground banks in one obscure form or another, all of which is less or not regulated at all.

If ignored long enough the growing influence of these "shadow banks" have the potential to undermine the China government's control over its huge financial system. This also probably explains why the asset markets, stock markets, and food prices is still edging up in spite of cooling measures on official bank loans and the overall markets by the China authorities.

With a "shadow" interest rates of up to 10 percent and more, this underground web of private funds may well be what is creating China's real estate and other asset bubbles.

China's Yuan RMB Currency Exchange Rate

One of the most often used tools used by governments to control inflation is the country's currency exchange rates.

For the past decade since around 2000, China's export driven boom have been partly driven by an artificially limited low rate. Since late 2009 to early 2010, China's central government have come under pressure mainly from the the US, and have gradually allowed the Yuan (or Ren Min Bi, RMB) to gradually appreciate against the US dollar.

The appreciation of the RMB is one of the most immediate ways that China's government can limit the pace of inflation which is probably one of the most important reason that it is doing it.

Rising Inflation Rates in Hong Kong

Rising inflation rates in China.
Rising inflation rates in China. | Source

Share Your Thoughts of Inflation in China, Asia and the World

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    • krosch profile image

      krosch 

      7 years ago

      The really interesting impact will be to see how China now reinvesting in the United States will affect the World Trade dynamics. For example I live in Northern Minnesota and because of massive Chinese investment buying 30% of local Iron Ore mines (the most they can own by US law.) they have pumped a massive amount of money into our region to reopen these mines that were shuttered.

      Furthermore they just purchased a small aircraft company that I believe is the second largest such company in the United States that is made in Duluth Mn, where I live.

      The global dynamics of these sorts of things are going to be very interesting to follow in the coming years.

      Great Hub, Thanks for posting it. Voted up!

    • onenewbrazil profile image

      onenewbrazil 

      7 years ago from Edmond, OK

      I enjoyed this very much. Keep up the great HUBS. Up one and Useful. I invite you to evaluate my hubs. Have a nice day.!

    • Pamela N Red profile image

      Pamela N Red 

      7 years ago from Oklahoma

      I think America's economy has something to do with it as well. We are one of the largest buyers of Chinese goods and when we are in trouble and buying less it causes China to have less income. Hopefully we can get back on track before too much damage is done.

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