December 8, 2010
Wellington, New Zealand
The price of a Big Mac is going up in China by 7%. In fact, Chinese state media outlets are reporting that prices for all items at McDonalds fast food restaurants across China are going up by 1/2 to 1 renminbi (RMB), roughly 7.5 to 15 US cents.
It doesn’t sound like much, but it’s a sign of the times; the epic battle between countries which export deflation (namely China) and countries which export inflation (namely the United States) is drawing to a close.
For years, China and most of Asia have been diligently producing the majority of the world’s low-tech finished goods at ridiculously low prices. 60-year old women toiled for 80 cents an hour so that North Americans and Europeans could buy useless knick knacks for peanuts.
Meanwhile, Western European nations and the United States have been flooding the world with hundreds of billions of dollars, euros, and pounds. This cash has made its way into commodities markets and emerging nations’ property and capital markets.
China has been absorbing this exported inflation (and producing its own) for years– the hot money that’s crossed its borders has driven up prices, wages, and other input costs, and in order to stay profitable, companies have had to raise prices… hence the 7% capitulation for a Chinese Big Mac.
Because the renminbi has closely tracked the US dollar for so long, Chinese workers have seen their currency’s purchasing power inflate away against livestock, agricultural commodities, and now fast food.
Massive inflation is politically unpopular, even in China’s single-party regime. You don’t hear about it much in the media, but there have been riots over food prices (up 20% in the past year) as well as a spate protests from factory workers demanding (and getting) higher wages.
As an example, iPod manufacturer Foxconn increased its workers’ salaries by over 20% across the board earlier this year. Needless to say, price inflation in China (which begets wage inflation) has serious implications for input costs and finished goods prices in the west; in other words, China will start exporting its own inflation.
In their efforts to tame inflation, Chinese bureaucrats raised interest rates in October and appear be doing so again this weekend. There is also talk of price controls, lending restrictions, and additional crackdowns on speculation.
These are half-hearted efforts at best, and history shows that they never work in long run. And so, while price controls will have serious implications for the markets and nervous investors, Chinese people will likely be paying much more for their groceries again by this time next year.
Drastically higher interest rates and a strong renminbi would do the trick to curb inflation, but these measures would shock China’s economy– an equally unpopular outcome. As the country gradually transitions to one based on domestic consumption, higher rates and a stronger currency will be slowly phased in.
When push comes to shove for now, though, China’s leaders will choose inflation over stagnated economic growth. After all, it will be easier for the Politburo to crush an occasional McFlation protest, censor it from the papers, dish out a few free bags of rice, and start exporting higher prices to the West.