What's Behind Global Inflation: China Creates A Record 2.9 Trillion New Loans In One Month

According to one monetary theory, in a world in which China is the dominant creator of debt - which it has been since the financial crisis - it is also China that is the marginal creator of the global inflationary impulse. In which case, the latest Chinese new loan data helps explain the recent inflationary burst which judging my the recent market volatility has freaked out US traders, because according to the PBOC, in January China created a record CNY2900 billion in new loans ($458.3 billion), a striking rebound from the CNY2030 billion a year ago, and almost 1 trillion yuan above the CNY2000 expected.

According to Reuters, the credit boom has been fueled "by strong economic growth, a robust property market and a crackdown on riskier shadow lending, which has forced banks to shift some loans back onto their balance sheets." But mostly it has been forced by an implicit demand on Beijing to keep the global reflationary impulse strong at a time when the Fed is shrinking its balance sheet - a highly deflationary, if only for circulating monetary aggregates, exercise.

A more detailed breakdown of the loan data showed sharp pickups in demand for credit from both households and companies, a harbinger of strong consumption and investment, if both funded on credit. Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December.

Meanwhile, with the fate of the US capital markets in the hands of the inflation/deflation debate, the real answer what happens next will not be found in the BLS seasonally adjusted average hourly earnings dataset or the Wednesday CPI print - these are merely measurements of the underlying credit dynamics - but half way across the world, in Beijing, which decides month after month, what is the proper level of new credit with which to lubricate not only China, but the rest of the world as well.

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