Chinese Inflation Explodes: Hits 3 Year High 6.4% In June

It had been widely expected that Chinese CPI would come in smoldering in June, with some predicting a print of 6% or just over. Few, however, expected 6.4%, a blistering spike compared to May's 5.5%, which is the highest inflation recorded in China in 3 years, and depending on how one looks at GDP (and the government's way is certainly modestly flawed to say the least), China may well be approaching the revolutionary point where real interest rates turn negative, and purchasing gold becomes a costless opportunity, which in turn would send the price the yellow metal well north of $2,000. China Daily, the government's official mouthpiece comes with the usual Douglas Adams advice: "We don't have to panic about the June CPI figure," said Zhang Liqun, a macroeconomic analyst with the State Council Development Research Center, China's top government think-tank....Of the 6.4-percent CPI growth in June, 3.7 percentage points were contributed by the carryover effect of price increases last year, the NBS said in a statement on its website. "A CPI growth above 6 percent doesn't mean the inflation situation is worsening in China, because 3.7 percentage points of the increase were contributed by the carryover effect," Zhang said." See: inflation is transitory. First in the US now everywhere. Elsewhere, expect more RRR hikes to follow in the coming weeks in the aftermath of the just announced general interest rate hike as the PBoC, contrary to its own advice, starts panicking.

Charting Chinese CPI:

More on the "dont panic" meme:

Food prices, which account for nearly one third of the basket of goods in the nation's CPI calculation, continued to rise 14.4 percent in June from the same month last year, a pace faster than May's 11.7 percent.

Growth in non-food prices also accelerated to 3 percent in June, up from a year-on-year increase of 2.9 percent in May.

In terms of regions, the CPI rose 6.2 percent year-on-year in China's urban areas, and the growth in the rural areas was 7.0 percent, according to the NBS.

On a month-on-month basis, food prices added 0.9 percent from May, with the pork prices jumping 11.4 percent from previous month. Month-on-month price declines were reported in vegetables and fruits. Non-food prices were flat in June as compared with May.

Calling the June CPI figure "within the market's expectation," Zuo Xiaolei, chief economist for the Galaxy Securities, said the inflation rate would remain high in the future because "it takes a while to release the inflation pressure gradually."

Zuo said under such great inflationary pressure, she foresees no change in the country's monetary policy, which will be kept in a reasonable range to maintain a steady economic growth.

And more:

Liu Shucheng, a senior economic research fellow with the Chinese Academy of Social Sciences, said China has had an inflation rate around 6 percent many times in the past. According to the NBS data, China has seen a monthly CPI growth above 6 percent eight times since 2007.

"Our country has experience to battle an inflation rate around 6 percent, but of course we should manage inflation, particularly the inflationary expectation," Liu said.

Regarding the outlook of inflation, Liu expects CPI growth to weaken starting July due to the government's anti-inflation measures, tighter liquidity in the market and falling commodity prices in global market.

So far so good. The problem with the whole liquidity withdrawal approach is that it is, well, really withdrawing liquidity. The recent move higher in SHIBOR, which most expected would be merely transitory like back in January and February, is proving to be rather resilient, with 7 days interbank lending and repo rates now firmly lodged above 6%.

This is without doubt the biggest threat to the Chinese economy, whose banks now finds themselves unable to borrow in the interbank market absent liquidity injections from the PBoC, which in turn end up showing up in subsequent CPIs. And if there is a CPI print north of 7% in the second half of 2011, we predict that will do more for the price of gold than any other yet to be validated theory about short covering sprees, or exchange busts, or anything else.