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Thursday, May 25, 2006 

"China's Pollution Battle Might Fan Inflation"

A very interesting commentary piece on Bloomberg today: "China's Pollution Battle Might Fan Inflation."

[P]ollution in China might put more upward pressure on prices than many investors anticipate.

``China has kept the global cost of production artificially low by not paying for pollution and labor benefits,'' said Andy Xie, Hong Kong-based chief economist at Morgan Stanley. ``The political pressure within China is as such that the government is normalizing production costs, which could boost global inflation.''


"If China's factories followed the environmental standards of Organization for Economic Cooperation and Development countries, producing goods would be far more expensive."

``Normalization of China's production is a major source of cyclical inflation,'' Xie said. ``Part of the unsustainable disinflation globally between 2002 and 2005 has to be regurgitated.''


Rising Chinese wages could change everything. ``While the central case is for inflation to tick up slowly,'' Xie said, ``the possibility exists for inflation to flare up sharply.''

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