China Inflation `Volcano’ May Prove Too Hot for Controls After Cash Surge

China Inflation `Volcano’ May Prove Too Hot for Controls After Cash Surge
23 November 2010, (Bloomberg)
http://www.bloomberg.com/news/2010-11-22/china-inflation-volcano-may-prove-too-hot-for-controls-after-cash-surge.html

Excerpt:

“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University.

With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.

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China also is grappling with inflows of cash sparked by monetary easing abroad, bets on yuan gains and a trade surplus that surged last month to $27 billion. Officials have faulted the U.S. Federal Reserve’s plan to buy $600 billion of Treasury securities for contributing to asset-price pressures in Asia.

“Quantitative easing in the U.S. puts China’s seat to the fire because it forces more inflationary pressure onto them,” said Diana Choyleva, a Hong Kong-based economist at Lombard Street Research Asia. “They cannot avoid what they need to do,” which is raise rates or let the yuan strengthen, she said.

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While price controls may help with inflation expectations, they will either be ineffective because producers circumvent them or create shortages if suppliers suffer losses and are not compensated, said Goldman Sachs Group Inc. economists Yu Song and Helen Qiao in a Nov. 17 note.