Shaun Rein by Fantake via FlickrChina will not be able to play a role in mitigating a new financial crisis, like it did in 2008 at the first dip, writes business analyst Shaun Rein in CNBC. Sky-high debts and a stiff inflation rate limit the country’s room
Three years later, total local government debt alone is 10.7 trillion yuan, around 27 percent of GDP according to Jia Kang, the director of the Research Institute for Fiscal Science under the Ministry of Finance. Concerns about off-balance sheet debt held by special investment vehicles set up by local governments that don’t show up as public debt are also high. China’s debt is far from dangerous, Japan’s debt was 225.8 percent in 2010 according to the IMF, but is high enough to mean less room to maneuver than in 2008.
More importantly, China has less wiggle room because of persistent and structural inflation and the government’s desire to create a middle class by raising minimum wages. Already in 2011, 13 provinces have raised the minimum wage by over 20 percent.
Chinese inflation is not at the 20 percent annual level hitting Vietnam, but it is at the cusp of becoming a serious problem. One more natural disaster like the tsunami in Japan or a war on the Korean peninsula could turn China’s inflation into something along the lines of Vietnam’s.
Official Inflation in China came in at 6.5 percent in July, despite price caps in the oil sector.Food inflation is far more serious at 10-15 percent. Pork prices, the main meat staple for Chinese, has risen 50 percent in the last year. Apple prices have gone up 30 percent and yogurt 25 percent.