Is China already in a hyperinflation?

Posted on 22 April 2013 with no comments from readers

Visitors to China these days cannot fail to notice that prices in the local shops for most goods are actually significantly higher than they would pay in the US or Europe. Food prices have doubled in three years. Apartments cost 20 times annual salaries in the big cities.

Has China already experienced a hyperinflation? The money printing of four years ago during the global financial crisis, equivalent to half-a-year of GDP has come back to haunt the nation with a vengeance.

Stimulus side-effects?

In the provincial city of Xian ArabianMoney visited an average department store and found Clarks shoes – made in China but a UK brand – selling for $220 a pair against $80 in Britain. This was far from an isolated example.

We noted locally-branded short dresses cost about $500 each. That would buy you a good brand in the West End of London. Our guide told us that locals like to go to Hong Kong to shop whenever possible because prices are so high.

They have faced the same hyperinflation in ordinary food items like pork or fresh vegetables. But the hyperinflation has been most notable in house prices. Around $210,000 for a 140-square-metre, three-bedroom apartment in Xian might be less than half the cost iof Shanghai, but then the average salary is less than $4,000 per annum.

People who could afford to buy on a mortgage in 2008 could not afford it now. Rents have also soared through the roof though not by the same amount. Yields of less than two per cent on property are tiny compared to 3.2 per cent paid on cash deposits by Chinese banks.

The choice of the monetary policy of a country to debase its currency to curb the inflation going beyond their reach is definitely a very near possibility for other countries like China where the mechanism and mindset to fight out inflation like the US is not based on the fact that the full details on how the amount of cash is reduced in the system and raises the interest rates.

Indeed, salaries have risen by at most five per cent per annum, so the squeeze on the local economy has been huge. Only the wealth effect has kept spending up among house owners who feel much richer after house price rises and spend all their income.

Bubble economy?

Classic hyperinflation economies create a bubble that then collapses. We could see in Xian that most of the city’s massive construction sites for apartment blocks are at a standstill.

The market for new apartments has stalled. People cannot afford them so completed apartments are left empty and then the developers run out of money and stop building.

This is what happens with market forces eventually take over in a hyperinflation. Then you have the construction workers with no income and in China there is virtually no social security. Jobless workers do not spend and you get a downward spiral in the local economy.

So why are shop prices so high in China and not yet in the West? Perhaps they are subsidizing exports by charging more at home. If so this is madness because local people are not buying now except when they really have to.

Empty shops

The shops are struggling to find customers, just like the newly built apartments. The luxury stores of Beijng also looked very short of customers to us. These used to be the shops with the largest sales volumes in the world.

That’s going to squeeze shop profits. Xian is also a tourism hot spot with its famous teracotta warriors. But local tourism is also 20 per cent down on last year, and the prices they now try to charge for local products and souvenirs are ridiculous to most visitors.

Hyperinflation usually ends with a nasty crash, and China now appears close to skirting with that fate. You simply have to look at the prices in the local shops to work this out.