Monday, November 15, 2010

Phil Flynn: China Bubble Means Potential Commodity Trouble

China has enough inflation problems already but the Fed and their policy of quantitative easing may be forcing the Chinese to take more aggressive steps to subdue inflation. Commodities across the board plunged when the “Economic Daily” reported on its website that an economic researcher with the Chinese Academy of Sciences predicted that the Chinese central bank may raise interest rates twice, on time late this year and again early next year. According to Bloomberg News the country’s consumer prices may grow 4 percent in November and December, pushing full year inflation to 3.2 to 3.3 percent, the report said.

It's expected that China’s consumer prices may grow at 4.7 percent next year. This caused bulls to take stock of their overbought markets and caused a wave of aggressive profit taking. The Chinese is of course the main driver of commodity demand. Commodity and oil bulls look to China as their justification to ignore a global glut of supply. The market had been inspired with a slew of improving demand forecasts such as the one from The International Energy Agency which increased its 2010 oil demand growth forecast by 190,000 bpd to 2.34 million bpd from its previous monthly report on stronger demand in both China and other industrialized economies. The Fed's QE2 is adding to these inflationary pressures.

Hot money is flowing to emerging markets and if China fails to moderate inflation it could create the potential for overcapacity. This emerging market mania has also been helped along by China’s stubborn refusal to allow their currency to reflect its true value. The Chinese, by controlling their currency, runs the risk of creating another major economic crisis if they allow their bubble to pop. Their signals are hopefully telling the world that are prepared to increase interest rates. Maybe they are starting to get it. If the Chinese fail to act quickly enough then the world should get prepared for another bubble to pop.

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