The Energy Report for Thursday, March, 11, 2010

HOT! HOT! HOT! Inflation in China may be getting too hot to handle! Don't touch or you could get burned. Could emerging China bubbles turn the commodities bull market into rubble? China’s inflation rate for consumer prices came out at a much hotter than expected 2.7 percent. That was sizzling compared to Januarys 1.5 percent rise and it was also a 16 month high. This sharp increase will make Chinese officials worry about potential trouble spots and may make them more aggressive trying to battle those inflationary demons.

So far it is obvious that steps by the Chinese government to let some air out of their rapidly expanding bubble have been a failure. Despite the aggressive move to raise reserve requirements on banks and step back from standing behind regional banks, it's obvious China is going to have to take away more of the punch bowel to help extinguish these inflationary flames. Heck they may need to pour the contents of the entire punch bowel over the flames to put it out. Of course the problem is that once you put out one fire another one seems to creep up.

Take for example this wonderful piece in today’s Financial Times titled, “Fears grow over China property bubble despite efforts at cooling." The FT says that, “Chinese real estate prices accelerated last month, rising by their fastest pace in two years despite government efforts to cool the market amid fears of a looming property. Prices of commercial and residential property in China's 70 largest cities rose 10.7 per cent in February from the same period a year earlier, up from the 9.5 per cent year-on-year gain in January, according to China's statistics bureau. Since the start of the year, Beijing has introduced a series of policies aimed at cooling soaring property prices and a procession of senior officials has warned of overly fast price rises and bubbles in some markets. The figures released yesterday include subsidized and rent-controlled housing, where low price increases drag down the overall increase, as well as commercial real estate, where prices have been subdued or falling. Analysts say housing price increases are significantly higher - and this is what mostly concerns the government because they have a direct impact on people's lives and their satisfaction with Communist party rule.” A must read in today’s FT.

Of course at the same time China’s exports surged rising a whopping 45.7 percent from last year. Those strong numbers are going to increase pressure on China to allow their currency to increase in value as it is obvious that the dollar peg at this point is hurting other exporters. What is clear is that if the Chinese government fails to reign in these inconsistencies then the Chinese economy is on an unsuitable trek destined to crash. Oh sure I have heard that this time it is different, China is bubble proof! We hear it every time there is a bubble.

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