Don’t Overestimate China’s Inflationary Impact
Commentary
The so-called restart of the Chinese economy has largely just echoed the market. But some suggest this will give a new push to global inflation when strong demand from China drives the resource markets. However, maybe we should revisit the basics: Where does that strong demand for Chinese production come from? Isn’t China the factory for the world? But if the rest of the world has sluggish demand due to inflation and rising interest rates, will this still be the same story as that of a decade ago?
For this inflation conjecture to be true, China’s restart should have booted up its own inflation before sending goods to other countries. But as the accompanying chart shows, even the first part of this logic fails. According to the basics of monetary theory (or even common sense), inflation is always a result of too much money or money turnover being too fast. China’s monetary authority, the People’s Bank of China (PBoC), has been accelerating the economic base, but the velocity has remained low, given that year-over-year credit growth is staying stagnant….