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China's Latest Export: Inflation

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NOW THIS IS HAPPENING
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Rob Schmitz, China correspondent for American Public Media's Marketplace, explained last night what he's seeing on the ground in Shanghai, vis-a-vis rapidly rising prices and what the populace is doing to manage.

SCHMITZ: I've noticed that my Chinese neighbors are changing their buying habits a little. Instead of heading to the supermarket down the street, they're flocking to open-air markets now where they can bargain. And of course, they're not buying as much. But you're seeing more families invite grandpa and grandma over for dinner to share meals. So a lot of these things that were commonplace in China for decades are starting to make a comeback. On the more serious side, two weeks ago here in Shanghai truckers held protests that turned violent and this was all because their incomes haven't kept pace with the price of fuel.



Host Tess Vigeland then asked Schmitz if the Chinese government was concerned.

SCHMITZ: Yeah. I mean, when inflation gets to the point where it's causing social unrest that's definitely something that grabs the attention of China's government. Local governments set the minimum wage here in China and they've been raising minimum wages by an average of 20 percent over the last couple of years. Yesterday I spoke with a sanitation crew in Shanghai and spoke to them about inflation. They said it was a problem, but they told me the city gave them two pay raises this year so they seem pretty content with that.



The upshot?

"Chinese workers are demanding and getting better wages," Schmitz explained. "Higher wages will be passed down to you, the American consumer. And all of a sudden, those cheap Chinese goods that were helping to keep prices low in the U.S. are going to have higher price tags on them. And then, voila, you've got inflation."



As Money Morning's Jason Simpkins writes today, "the time has come for [China] to evolve from a source of cheap labor and manufacturing to a fully developed economic power with a consumer class that's capable of sustaining domestic growth."

That means a yearly 13% increase in the minimum wage through 2015, a promise from Chinese Premier Wen Jiabao to increase per capita household income by 7% a year "in real terms during that period" and a a law that exempts those earning less than $500 US dollars from income taxes.

So, Chinese wages go up as American wages, well...don't:



Leading to more expensive iPads, Thinkpads, and, yes, American flags:



This will certainly raise the standard of living for the Chinese, which is hard to argue against. And hey -- as far as wage inequality goes, we're still better off than Uganda. But not by much:

POSITION:  No positions in stocks mentioned.

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