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What the consequence of the huge inlfation? a huge disaster?
That's of course an important question.
China is not facing a hyper-inflation and can NOT be compared with Zimbabwe by any means - so the Yuan as a currency isn't jeaopardized and I'm confident that our children will still buy their drinks in Yuan if they're in China.
However, there are of course negative consequences if you're having an inflation of around 10 percent p.a.:
- risk premiums hike: because you don't know whether your money still worthes the same tomorrow, you'll ask for higher interest rates. Thus, capital becomes more expensiv and as a result, less business opportunities pay off. Therefore, China's innovativity decreases due to the inflation.
- the cost structure changes: companies will spend a higher proportion of their incomes on interest rates and therefore won't increase salaries (or at least increas them slower than the prices are increasing). Finally, workers end up with less purchasing power. This might, according to the Chinese government, lead to social unrest, but I'm not an expert in this field and therefore can't judge how big the threat of social unrests really is.
- Wealth is redistributed towards the rich: this is probably the worst consequence of all! Savings of ordinary Chinese decrease in value, while asset prices hike (and might even end up in bubble). So those people who invested in businesses are profiting, while the already poor who can't afford running a company are loosing money.This is a huge problem, because there is neither a decent health care nor any reliable pension nor a sufficient social security system in China, so people need their savings if they grow old, lose their jobs or get sick.
This leads to two effects: on one hand, people get really unhappy with the government, which threatens again social stability in China. The government is trying to blame the inflation on higher commodity prices or greedy foreign companies, but this doesn't work as everyone knows about the huge stimulous package.
On the other hand, people can't do anything about it, (if they don't want to become violent), so they try to deal with the situation and save more money. Which means they save a higher proportion of their income. Which means they spend a smaller proportion of their income. Which harms the economy, especially small businesses - and they, in turn, safe again. A vicious circle.