How the US downgrade affects China's inflation - Shaun Rein

The world's major stock markets braces for a black Monday, but also China's financial policy makers have had a sleepless weekend over the US downgrade by S&P, Shaun Rein writes in the CNBC. They get now very vocal on the financial problems of the US.

The downgrade will have a far more serious affect on China than just eroding the value of its reserves, but there are no easy solutions. The most serious problem in the short term is inflation, which will get worse as investors shift away from U.S. dollars and into commodities.  On Monday there was a selloff in commodities, but in the long term if the dollar continues to fall commodity prices will rise. The downgrade also increases the possibility of another round of quantitative easing in the U.S., which is negative for the dollar and will heighten inflation.

Inflation has already been running rampant in China as rising labor and real estate costs combined with soaring global commodity prices have been a double whammy for the economy.

Inflation officially hit 6.4 percent in June, a three-year high, but it feels much higher for everyday Chinese because food costs have soared 10 to 15 percent. Yoghurt prices have gone up 25 percent in the first half of the year and home prices in most of the country have risen by double digit percentage points in 2011 despite tighter policies on mortgages. Thirteen Chinese provinces raised their minimum wages by over 20 percent in the first half of the year...

The bickering by America’s political class is having grave affects on China and the rest of the world. The damage to America’s standing in the eyes of the rest of the world has been far worse because of the perception that the world’s financial system has been hijacked by members of Congress who put political campaigning ahead of reason.

More in CNBC

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting of conference? Do get in touch.

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