Over the weekend, FT noted that China’s central bank reported that companies and individuals sold RMB 684 billion ($109 billion) worth of foreign exchange and bought an equivalent amount of Chinese currency in January, a record for a single month. On the chart below, please point out the Chinese "hot-money" inflationary ticking time bomb (hint: highlighted).
Why "time bomb"? For the answer, we go to the simplest definition of inflation, which is as follows: "when too much money chases too few goods and services."
In January, the money in domestic circulation via FX conduits just soared by a record amount, without a comparable increase in goods and services. All else equal, this is called the "hot money" effect, and manifests itself in a surge in Chinese inflation usually with a 3 month lag to whenever the Chairsatan starts experiment with the US monetary base.
January just happens to be about three months after Bernanke announced QEternity. It also explains why China has been doing everything in its power in the past several weeks to reduce excess liquidity in its economy, and to telegraph that suddenly its economy is once again slowing down drastically, while inflation is ramping up.
Take home: China has had enough with the global, and certainly Japanese, reflation efforts as further proven by last week's repeated warnings by the entire Chinese political elite against currency wars.
How much longer will the "developed world" be able to push Chinese inflation before, like in 2011, it all just snaps?