2008-01-16

Inflation gets worse; PBOC Tightens

A sure sign that inflation is getting out of hand is when the government tries to blame its own citizens for responding to price signals:
Companies that hoard goods or try to fix prices can be fined up to 1 million yuan, or $130,000, up to 10 times the previous penalty, the cabinet said on its Web site.

When people see pork and cooking oil increasing in price as fast as stocks, they do what comes naturally: buy and hold. China suffers from a meat shortage caused by disease and the global biofuel craze that is pushing agriculture prices ever higher, in addition to rapid money supply growth, courtesy of the U.S. Federal Reserve.

The PBOC is doing what it needs to defeat inflation, but now some analysts are worried that a U.S. slowdown will result in a policy overshoot:
``As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown,'' says Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase & Co. ``If the central bank raised interest rates too much, it would damp domestic demand and increase the danger of economic downturn.''

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