Chinese Inflation

When a Chinese restaurant removes kung pao chicken from its menu, there’s going to be problems.

It caught my attention in what may have been another thrill-less economic story. The LA Times article, “China’s inflation rate edges up in March,” focused on the 3.6% inflation rate as a potential threat to economic growth. It mentioned a China National Radio’s report about a restaurant wrestling with rising food costs, in particular green onions.

What’s the big deal? They’re an emerging country expected to grow 7 to 8 percent this year and within their policymakers’ target 4% inflation.

• China is a growing player (consumer, producer and trade) in this world. As a percentage of global figures they represent about 19% of the population, 14% of GDP, and 2% of the equity market).

• Do they report the whole story? CPI is a composite of many factors. Housing prices have soared ten-fold over ten years while the Shanghai stock index was flat. Food and fuel prices are up – food up 12% last year, eggs 24% and pork 44%. That can’t be pleasant.

• They face major social and economic issues. The CCP (government) and CBC (Central Bank of China) have controversial policies. China faces a three wave dilemma (preferential policies for state-owned enterprises over private business, worker strikes, and foreign businesses withdrawing – e.g. cheaper labor) and potential bubbles in housing and credit.

Inflation is not a sexy investment story. However, the “silent menace” is an important part of planning financial success and living life with independence and dignity. Here are three considerations for investors:

It’s a personal thing“Why does my father in his 70’s need inflation protection? He’s been living well off his pension, happy playing golf and won’t need luxury cars, travel, or a bigger house.” Inflation is a tax on fixed income. And pay raises are necessary in retirement. Why not drive a safe and reliable vehicle until DMV says “sorry,” send your grandkids airline tickets when your days of travel become labored, or hire help with the chores? Picking up an occasional lunch tab with your golf buddies, putting nourishing food on your table, or decent health care?

Protect for rising costs – Bill Gross’ “The Great Escape” (April commentary) is good read. He discussed lower expected returns (slowing global economies, and inflation), earning real returns (net of inflation), and shortening duration. That last point is the notion of owning investments that return your profits and your principal sooner, than later – inflation erodes the value of future cash flows.

Don’t overreach – When savings and CDs are paying zilch, it’s tempting to stretch for higher yields. But there’s a trade-off of risk and return. Perhaps it better you stay focused on total return (rather just yield), curb the desire in reaching for the junk, and be wary of short term bond funds as alternatives for your cold hard cash.

And when I think times are tough, I’m glad I’m not in China. Many dishes contain green onions.

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