Will China pop the luxury bubble?

Inflation may be near 5% in China already and the government is moving slowly to contain prices. This could spell bad news for the luxury market once the government decides to slam the brakes. Andy Xie covers the topic and turns back to wine in his latest article:

Bottoms Up for China's Lafite Wine Bubble
Yet the Lafite craze is at risk for a deeper reason: China's new fight against inflation. The government is currently blaming speculation for climbing consumer prices, although the real cause is a five-fold increase in China's M2 supply over the past decade.

To tackle these rising prices, China must raise interest rates. As long as real interest rates are in the negative zone, any sort of crackdown on speculation is unlikely to work. Even if the government locks up all the speculators in Wenzhou, they'll still have to contend with their counterparts in Quanzhou, Chaozhou and a thousand other cities.

Interest rates should be hiked by three percentage points right now. Of course, the government will only raise rates gradually. But when they do go up, the shine will come off all that Lafite in the cellar.

The world's fine wine market is closely tied to the U.S. Treasury market, but Lafite is especially sensitive to China factors, including tighter monetary policy. In addition, the Lafite market cannot be separated from political risk. For example, just as the government banned officials from playing golf a few years ago, officialdom's restrictions could spread to Lafite-sipping. That kind of a ban would be hard to enforce, but at some point it could become politically hazardous to drink Lafite.

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