6 Predictions About China in 2011

International economists talk about Europe being stuck between a euro and a hard place. You could say the same about China and inflation. The most straightforward way to tamp down the country's fast-charging food prices is to raise interest rates to control the velocity of money. But higher interest rates will hit the housing market in two ways. First, it will slow the rise of home prices. Second, it will make it more difficult for some borrowers to pay back their mortgages. Either way, the middle class feels the pinch.

Inflation in food prices will take longer than expected to control.
The drivers of inflation are much more structural than cyclical.
Indeed, the entire system is now so highly stressed that one snowstorm
brings large spikes in food and energy prices as coal runs short. When
ice shuts down the roads, as it does today in much of southwestern
China, agricultural products simply cannot get to market.

Chinese consumption patterns are shifting as people become
wealthier--more meat eating requires more cereals to feed the animals.
The food supply chain, running at the limit, is close to breaking, and
the pressures this problem creates will lead to further food quality
crises. What's more, price caps won't be effective in creating a better
balance between supply and demand. Rising food prices are a pan-Asian
issue: inflation has recently surged in Indonesia (chilies), India
(onions), and South Korea (cabbage and now beef as a result of
foot-and-mouth disease). China, given its large absolute demand for so
many agricultural products, will shape food prices across Asia.

A major second- or third-tier Chinese city will see demonstrations over
food price rises, unemployment, or both, on a much larger scale than
anything that has occurred in recent years. The demonstrators will
probably be satisfied quickly by local action to increase financial
support for them and to replace local-government leaders. Yet concerns
over copycat actions elsewhere will lead to a nationwide preemptive
program to support the urban unemployed.