Inflation threatening Chinese growth

Last week was an interesting week for Chinese stocks. While I wrote about PetroChina's debut and its subsequent record-setting $1 trillion market cap, my colleague and fellow-BloggingStocks blogger, Aaron Katsman, wrote about the potential bursting of the Chinese bubble.

With growth and excitement like this, we shouldn't be surprised to read today that China published inflation numbers that matched its own decade-long record high of 6.5%. This will put additional pressure on the Chinese Central Bank to raise interest rates, something it has already done 5 times this year alone.

The Bank blamed rising food prices in general for the inflation run-up and said that prices for pork, in particular, had skyrocketed 55%. October's record $27 billion trade surplus injected even more cash into the economy, stoking inflation that's twice the 3% pace that is the central bank target. Chinese trade surplus reached an all-time high this month -- in spite of the Central Bank's pledge to rein in export growth. BloggingStocks reported yesterday that Henry Paulson, Secretary of the US Treasury, is expected to continue lobbying the Chinese to relax restrictions on the Chinese yuan to allow for faster appreciation of the Chinese currency.

For a regime that's generally light on true visibility into what's really going on, I wouldn't be surprised if the real inflation numbers are actually in the double digits. A related story reports about a stampede at a supermarket sale of cooking oil that killed three people on Nov. 10 in the central city of Chongqing, as reported by state media.

Nothing ever goes up in a straight-line trajectory. If you believe in the Chinese growth story (and I do, by the way), there will be bumps, some major and some minor, along the way. Let's watch how the Chinese seriously address inflation as we decide our next move.

Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC., the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds no positions in the stocks mentioned above but does own a Chinese market ETF, FXI.