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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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