The inflation rate in China was 6.9% in November, setting off all kinds of concerns that the economy there could overheat. Food costs rose at an annual rate of over 18%.

According to Reuters, "last week China's top leaders announced they would shift to a 'tight' monetary policy from what they called a decade-long 'prudent' stance. The stubbornly high consumer price inflation should reinforce their determination, analysts said."

The Chinese central government has no one to blame but itself. It has kept the economy moving up by offering easy credit to both businesses and consumers. As long as it was possible, it kept the price of commodities like food and oil down by underwriting the difference between what the world market pays for goods and services and what was paid by people inside China. Gasoline and diesel still sell for a small fraction of their price in the US. But, as the government starts to move toward an open market economy, those prices are spiking up.

As the government privatizes large companies it owns and more foreign products come into the country, prices are rising. China can either continue to provide capital and watch that drive inflation to over 10%, or it can cut capital and potentially decrease GDP growth.

Giving consumers and businesses a credit card with no limit on it has not done China any favors. There is now a large amount "past due."

Douglas A. McIntyre is an editor at 247wallst.com.

China's inflation rate near 7% originally appeared on BloggingStocks on Tue, 11 Dec 2007 10:49:00 EST. Please see our terms for use of feeds.