Manufacturing’s Robustness Allows More Interest-Rate Hikes

Not unsurprisingly, it looks as if the food price controls introduced last month won’t have much impact on November’s inflation figures, due to be released in the middle of this month. The consensus view is that consumer price inflation number will come in at approaching 5%, up from October’s 4.4%, itself the highest level for more than two years and way above the 3% target for the year.

High food prices are the symptom not source of China’s inflation. As we and many others have noted the excess liquidity slopping about the system is the underlying cause. Hence two reserve-ratio increases for lenders last month and increasing constrictions on new loans, particularly for the bubbly property market, as policymakers strive to rein in the money supply.

The central bank raised its benchmark interest rates in October, the first rise since 2007. The increasing pace of manufacturing output’s increase, up in November for the fourth consecutive month as measured by the Purchasing Managers’ Index, suggests the economy is growing robustly enough to take in its stride the further rise in interest rates that we believe is inevitable before the end of the month — and, dare we even think it, a rise in the value of the yuan, the only inflation-fighting tool that the central bank has barely touched.

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