Patrick Chovanec discusses the causes and effects of rising prices in China. Chovanec, Associate Professor at Tsinghua University, begins by describing how rising prices in China are related to asset inflation stemming from a large monetary stimulus. China authorized banks to fund projects by unfreezing bank reserves previously kept to counteract inflation, thus expanding the banking system and money supply by 50% over the past two years. This created an investment boom rather than a consumption boom, leading to asset inflation, which has recently begun to spill over into the consumer sector. This can be seen in price and wage increases. Chovanec briefly discusses wage increases in the context of the Chinese labor market, addressing speculation that China is tapped out of cheap labor. Chovanec then talks about China's need to transition from an export model to a domestic consumption growth model as its economy becomes more imbalanced. This will not be easy, and the burden of change will be borne either by producers and their employees, or by consumers. Ultimately, the adjustment must happen and China will become more expensive. Chovanec takes questions from the audience concerning investment in China's infrastructure projects, including airports and high speed rail; the importance of brands in China; the lack of consumer credit; the effect of asset inflation on the market; the need for leadership, vision, and increased risk tolerance; the importance of incentivizing environmentalism at the local level; and what China can learn from Japan's mistakes concerning the transition to an economy based on domestic consumption.

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