The unexpected rise of inflation in October in China – 4.4 per cent on a year-on-year basis – spooked global equity and commodities markets. As soon as Chinese authorities announced the unpleasant news and declared measures to contain further acceleration of price rises (a 50 basis points increase in bank reserves and possible price controls), investors around the world sold off equities and commodities in anticipation of a significant slow down of growth in China.

Official Chinese data show that rising prices of food, commodities, and housing fuelled the inflation spiral. Some Chinese analysts even blamed recent natural disasters for reducing harvests and adding to price increases. But China’s inflation scare is being driven by more fundamental and powerful forces than unco-operative weather.

First and foremost is the loose monetary policy the Chinese government has been pursuing for the last seven years. M2, a measure of the money supply, has risen more than three times in this period. This combination of negative interest rates and massive credit increase is the most direct contributor to China’s frothy property sector and broad inflationary pressures. Excess liquidity aside, rising labour costs (driven largely by demographics) and commodities prices are the other powerful long-term variables driving China’s higher inflation equation.