China: Inflationary Pressure to Grow Until Yuan Floats

Catching up with last week's news on the ASX, the market seems to have made another high. The ASX closed Friday at 6,456. Thank you three-month highs in tin and lead futures. And thank you two-week high in nickel futures. In fact, thank you all of God's metals, base and precious alike.

The two great re-valuations seem be unfolding without too much drama. The first re-valuation is the treatment of the resource stocks like the rest of the market, rather than cyclical stocks with less than predictable cash flows. The China story gained momentum, again, last week.

China's National Bureau of Statistics reported the Big Red Machine grew by 11.9% in the second quarter, topping last year's rate of 10.8%. Zoom, zoom, zoom, as they say on TV.

Even accounting for the misrepresentation and willing suspension of disbelief that comes with taking government-compiled statistics seriously, it's another jaw-dropping, head-turning, stomach-twisting performance for an economy that's industrialising at a greater speed and on a larger scale that the planet has ever seen.

Frankly, it all feels a bit out of control, doesn't it? "China's exports are growing at about 30% a year now make up 10% of world exports and 2.5% of world GDP," reports Jacqueline Thorpe in Canada's Financial Post. Inflationary pressures are off the charts in China. But this will be the case until the government floats the currency and releases it from its obscene relationship with the US dollar-which keeps Chinese exports flowing to America and American dollars flowing to China to fuel lending and growth.

The unwinding of this feverish, positive feedback loop is a matter of time. But when? And how orderly will it be? We don't expect the world to move from one currency arrangement to another with much precision. But we're going to be asking the question to anyone who will listen this week at the Agora Financial Wealth Symposium in Vancouver. Watch this space for answers.

Dan Denning
The Daily Reckoning Australia

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