China Economics2011: A Year of ReflationChinese economy in 2010 has featured a Goldilocksscenario, as a mix of normalized policy environmentand a tepid G3 recovery has helped deliver relativelystrong growth and modest inflation so far this year.However, the recent flaring in inflation suggests theGoldilocks scenario is close to running its course.It will be a Year of Reflation for Chinese economy in2011, as the post-crisis economic normalization andrebalancing carry on. Specifically, the lagged effect ofmassive monetary expansion in 2009-10 is expected tocontinue to provide strong tailwinds for inflation in thenear term, while the headwinds stemming from weakexternal demand are letting up. Beyond the near term,China’s economic rebalancing that features a shift ingrowth drivers from tradable to non-tradable sectorsalso points to a higher future secular inflation rate.