China Risks Inflation Getting Out of Hand: Expert
China's battle against inflation has plenty of investors worried about a major slowdown. The liquidity tightening is beginning to bite. Small and Medium Enterprises (SMEs) have been finding it hard to get loans and on Wednesday money market lending rates jumped 55 basis points (bps).
But the former Chief China Economist at the Royal Bank of Scotland says he's much more worried about inflation rapidly getting out of hand and creating a much bigger hard landing between 2012 and 2015.
"The risk is at this point the central banks starts to worry about slower growth and so it delays tightening... All of a sudden you do get a serious flood or drought, property prices start to rise again, and again the starting point for inflation is 5 percent you move very quickly upwards from that," Ben Simpfendorfer told CNBC.
Simpfendorfer, who also worked as the Senior China Economist at JPMorgan and is now the editor of China Insider, which publishes analysis of the Chinese economy, said he expects inflation in China to average between 5 and 10 percent a year over the next decade because of structural shortfalls in youth labor, land, water and oil.
His biggest concern is that if wage expectations get out of hand, China's central bank would be forced to tighten between 50 and 100 basis points over a short period of time, leading to a hard landing.
He acknowledged that China's policy makers face a conundrum. On the one hand, they would like wages to rise in order to encourage more consumption, but that also risks worsening the inflation problem.
"This is one of the contradictions of the growth model as we go forward and why we need to be bearish on inflation," he added.