How to Profit From Surging Chinese Prices

China reported unexpectedly high inflation in January, fueled in part by increased spending during the week long Chinese Lunar New Year. China's National Bureau of Statistics reported that January inflation surged to 4.5%, well above consensus estimates. A 10.5% rise in food prices was the leading cause of January's high inflation rate. Although the Chinese Lunar New Year has a tendency to distort prices, Chinese officials are wary of any inflationary surges that could lead to social unrest. The Chinese have been battling to contain inflation for more than a year and it seemed to be under control for the past few months. The Chinese were moving from a policy focused on fighting inflation, to one that focused on promoting economic growth. However, the latest inflation figures could complicate Chinese efforts to balance economic growth and inflation. The International Monetary Fund (IMF) recently warned that Chinese economic growth could be cut in half if a Greek default or some other economic shock led to recessions in the European Union and the United States. The IMF urged China to implement an economic stimulus package of about 3% of its gross domestic product if Europe and America fall into recession. However, January's unexpectedly high inflation could undermine the IMF call to increase domestic demand in China. Before the January inflation data was released, the Chinese government was expected to cut bank reserve ratio requirements (RRR) but the Chinese central bank is likely to hold off on any more easing, at least in the short term. Policy makers will want to see if the January price increases were a result of the Chinese Lunar New Year before making any more economic adjustments. If inflation proves to be making a come back in China, then Chinese leaders will be forced to make a painful decision to either focus on fighting inflation or to promote economic growth.