Last month, we discussed Exporting Inflation from China.
Time liked the post so much they more or less ran it in the magazine:
China’s Next Big Export: Inflation
Demand from China, along with other fast-growing emerging economies,
has driven up the price of oil and a wide range of other commodities
for the past several years. But what’s really worrying many economists
is the sudden appearance of relatively high inflation within China and
the ripples that might cause abroad. Despite five interest-rate
increases this year by China’s central bank, the country’s consumer
price index has been stubbornly on the rise. In August, inflation
climbed to a 6.5% annual rate, the fastest clip in more than 10 years.The government and some economists blamed the jump almost entirely
on sharply higher prices for meat and poultry, which surged 49% since
mid-2006. Beijing maintains that the rise in food costs, which make up
more than one-third of China’s consumer price index, was largely the
result of more expensive livestock feed and a one-off event: an
outbreak of a porcine disease that killed 70,000 pigs and prompted the
mid-September release of 30,000 tons of pork (about a quarter of the
amount of pork China consumes in a day) from a national reserve to help
stabilize prices.But other costs are rising as well — property prices are going up
countrywide at an annual rate of about 10%, according to UBS economist
Jonathan Anderson — and Beijing’s actions speak louder than its
soothing words. After the August inflation figures were released, the
government took the unusual step of freezing all state-controlled
prices, including those for gasoline, water and electricity. Aware of
the potential that high rates of inflation have for fomenting social
unrest, officials also warned businesses against gouging consumers; in
August, authorities accused instant-noodle makers of illegally
conspiring to raise prices. Meanwhile, to allay public anxiety about
eroding paychecks, Beijing has been encouraging local governments to
raise minimum wages, which cities including Beijing, Shanghai,
Shenzhen, Guangzhou and Nanjing have done.
Source:
China’s Next Big Export: Inflation
Austin Ramzy
Time, Thursday, Oct. 11, 2007
http://www.time.com/time/magazine/article/0,9171,1670255,00.html
Moin,
this chart tells the story…..
US Import Price Index All Commodities from China
jmf,
That’s probably more telling than trying to figure out China’s internal inflation. With much of the banking and large industrial sectors still state owned or controlled, inflation statistics are likely more story-telling than fact-finding.
Adding to the case for an inflationary impact on the US is the faster growth in Chinese exports to Europe than to the US. Chinese exporters might tend to eat cost increases in order to maintain US market share in a static market, but with EUR exports growing fast, the pressure to sell cheap in the US is diminished.
BTW, do you have anything on the constituent parts of the index (eg. weighting between commodities)?
yup. then the PBoC will raise rates to combat this.
if the fed is still in cutting mode, the dollar will fall further, exacerbating the inflation…
not good.
m3,
Even worse, by freezing retail prices (but obviously not costs) there’s a risk of a (further) buildup of non-performing loans in China’s banking system. Add that to the increasing stresses associated with currency sterilization to maintain the quasi-peg to the USD, and there’s an increasing risk of an “event”.
Putting price controls on, by the Chinese government doesn’t sound to encourging either. Everytime someone does that something breaks, usally big-time, in another area of the system.
Any experts here willing to fathom where the break will come? Remember when Nixon did that back in the 70’s…was there a reccession just about then? lol
BR, love your site. I would love to hear what you think the Fed should do going forward.
What should the Fed do NOW faced with a softening economy (housing bubble burst making the downturn worse than normal) in the face of inflationary environment?
1) Accomodate inflation and cut rates (oops it is the ’70s again). Oh don’t forget the housing bubble popped, so cut more than normal. take it down to 1% or 0%.
2) Cut rates less than in a normal contraction due to inflation (what Buba did in the ’70s). Growth recovery weak but inflation does not get out of hand.
They seem to be leaning toward option 1. they pretend inflation is contained. so instead of taking option 2, they will take option 1 and inflate. destroy the dollar in the process. that is my opinion.
clearly the chinese government is not as adept in managing ‘inflation expectations’ as the fed and bls (or is it just bs). instead, they are choosing to deal with it the old-fashioned way, price controls, a tried-and-true method, if ever there was one.
this is a snippet from an nyt article from late august.
In interviews, factory executives across the country complained of being forced to give double-digit raises in order to find and keep young workers at all skill levels. Three or four years ago, said Zhong Yi, vice general manager of a leather-jacket manufacturer in Hangzhou in east-central China, 800 to 1,100 yuan a month ($105 to $145) “was a good salary.”
“Now,” he said, “1,500 is the bottom” ($198).
as we all know, or are forced to acknowledge, inflation isn’t a problem until it starts sneaking it’s way into wages…..hmmmmm.
if only us workers had that sort of bargaining power…i’m pretty sure the growth in chinese compensation isn’t due to rising health care costs.
http://www.econreview.com/events/wageprice1971b.htm
Here’s a nice page about when Tricky Dick Nixon, put on the price controls.
This is another part of the slow train wreck in progress. Just because we have not seen much inflation in the CPI, does not mean the dam will not burst. A water level rise can be deceptive, and turns into a flood rather suddenly.
Unbelievable how the Fed debases the currency and claims inflation outlook is moderate. A few billion people coming online will swamp any deflation in US demand. 70s inflation is not far away. Helicopter Ben’s claims defy common sense.
one thing they apparently are not exporting are buy orders for the buck.
This graph about says it all…
https://image.minyanville.com/assets/FCK_Aug2007/File/sg2007101634801.gif
This is where I first read it.
http://jeffmatthewsisnotmakingthisup.blogspot.com/2007/09/chinas-newest-export-inflation.html
If the USD is not worth spit, can the chinese currency be worth much more with inflation pressures building there as well??
The chinese economy still relies heavily on central management and lacks transparency as compared to the US economy.
The US is much better equipped to deal with the challenges and imbalances that it faces.
While the momentum may be against the USD in the short term (until there is more visibility on the damage to the economy from housing), in the medium and long term there are unmatched strengths inherent in the US political and economic system that make the USD far from a riskless one way bet.
And if China suffers a setback, will that be inflationary or delfationary???
I got’cho Chinese inflation right here:
http://finance.yahoo.com/q?s=%5ETNX
Surely the “core” rate of inflation in China is well under control, America could export this “good” idea to the central bankers of China :)
This raises a host of issues but congrats on getting to drive the MSM. They do the data collection and you do the analysis. China’s been exporting deflation but that’s shifting for a couple of reasons. As well as the oil/energy price vector you note. The biggest problem is that in defending the renminbi they create the problem of excess liquidities that build up as funds flow back. Interesting times indeed as they say in Thailand (sourcing correctly)
Two very interesting vids I haven’t seen show up in print but both point to some of the same structural impacts of F&E that you pound on. Both also point to what may be more significant – the growing gap between PPI and CPI.
Greenspan and Jubak
Are inflation numbers legit?
http://video.msn.com/video.aspx?mkt=en-US&brand=money&vid=fc6e9453-5a4f-4f36-9ae3-b71c360d505b
Recently released inflation data show a big gap between the core number, which excludes energy and food, and the headline number. But MSN Money’s Jim Jubak says Wall Street is “nuts” to be ignoring recent energy price increases.
Our biggest export: Inflation by Jim Jubak, 10/5/2007
Greenspan on the Economy, Pt. 2
http://video.msn.com/video.aspx?mkt=en-US&brand=money&vid=3e256e80-bffa-4097-9792-b28be854f76a
Odds of a U.S. recession are now less than half, according to former Fed chairman Alan Greenspan. He shares his insight with CNBCs Maria Bartiromo
The biggest problem I see though is the gap between PPI and CPI which started in Jan04 and is accelerating: http://tinyurl.com/2anlj6.
FWIW – but think about what it says about margins and earnings let alone the macro consequences.
China learned this from the USA where inflation has been our #1 export for 25 yrs.
China can now play this game which will make Wall St. and Paulsen shit their pants !
I predict that in the future econ professors will be talking about “controlling the expectations, of expectation,” because what I see now is a market that has grown so use to hearing the fed whistle past the grave-yard that they don’t realize they are already in the grave.
China was on my mind today. I am wondering if a bailout of banks is attempted, will the US have to “sell” Taiwan to China to keep the chinese funding our debt?
Any ideas?
Food in short supply and the economy has soaring inflation and the population deeply in debt; China or the USA?
Beware the mob.
“‘Why, ’tis no great matter; for a very little thief of occasion will rob you of a great deal of patience: give your dispositions the reins, and be angry at
your pleasures; at the least if you take it as a pleasure to you in being so.” Coriolanus
Shakespeare
The most alarming statistic out of China is not economic: It’s the fact the government has to put down tens of thousands of riots in the countryside every year.
Except you don’t hear about that much in the news.
China’s economy is an overheated gasbag with a corrupt, ossified government. The whole place is ripe for a “correction,” political or economic or both.
It would be amusing if the major problem Bernanke faced was inflation. He is a depression/deflation expert. How ironic!
you guys are really negative on china,
they have trade surplus, are holding
foreign reserves,manufacturer to the world,
have an infrastructure boom, and are
trying to keep their currency down, and you equate that with inflation ??
“The most alarming statistic out of China is not economic: It’s the fact the government has to put down tens of thousands of riots in the countryside every year.
Except you don’t hear about that much in the news..”
Excellent point. They are facing a huge social inequality crisis. They have no choice but to keep employment at full throttle to try and find ways to spread the wealth or they face these uprisings further escalating. This is why I think there isn’t a chance in hell of them raising the yuan and risking exports and the employment the manufacturing sector provides. They have tens of millions of rural class moving to the cities. They must find employment for these millions or all hell will break lose internally. The policy makers are aware of this. Expect economic policy to be developed around maintaining maximum employment and diversifying economic benefits. Paulson and Bernanke shouting at them that they want them to do this, that, whatever……., they may have well save their breathe. There are hundreds of million of louder voices taking priority.
This post below from another blog but puts it in perspective quite succinctly.
“The Chinese President said at the Party Congress that they want to quarduple the Chinese GDP from the 2000 level by 2020. The 2000 GDP has already doubled, so it would mean an average 5.5% growth until 2020. And that is in yuan term. In dollar it would be even a lot less. Do they know something we don’t?
If the current trends would continue (11% growth and 5% yuan appreciation relative to the dollar), then by 2020 the Chinese GDP would grow 7-fold, to 21 trillion dollar (in comparison the current USA GDP is 13 trillion). Incredible. ”
Regarding Greenspan,
If I knew inflation/recesssion was coming, but didn’t want to blamed for it either from previous policies or just a news headline what would you do.
It seems to me that to say there is a 50/50 chance is perfect. Either way you are right. Greeny knows exactly what is going on. I can’t wait to see his actual memoirs that he will have published after his death. Maybe he will expose the Fed for what it it.
Containment:
.
Homebuilder’s sentiment will need a shovel to dig pretty soon if it wants to get any lower VJ
“Now,” he said, “1,500 is the bottom” ($198)……
…..if only us workers had that sort of bargaining power…i’m pretty sure the growth in chinese compensation isn’t due to rising health care costs.
What do you mean jopo. There isn’t a factory in the US that wouldn’t gladly pay workers $198 a month!
“now faces a slowing economy”
The economy has been slowing since last May 2006….it is only through the careful denial of any reality that it is just being reported as slowing. All the signs were there and were not acted upon so spare me the rhetoric that we are just realizing it has slowed.
“when you have your head up your ass you can’t see anything”
Sounds like the new mission statement from the FED….
Ciao
MS
China is getting stronger while US is
dropping dead…. I don’t get you guys that
are nervous on china ???
China’s forex reserve tops $1.43 trillion
http://www.chinaview.cn 2007-10-12 20:39:38 Print
BEIJING, Oct. 12 (Xinhua) — China’s foreign exchange reserve had reached 1.43 trillion U.S. dollars by the end of September, up 45.1 percent year-on-year, the People’s Bank of China announced on Friday.
A total of 367.3 billion U.S. dollars were added to the country’s foreign exchange reserve in the first nine months of 2007, said the central bank.
In September alone, the forex reserve rose by 25 billion dollars.
China’s soaring trade surplus is still the major contributing factor to the forex reserve boom.
Data newly released by the General Administration of Customs shows that China’s trade surplus for the first nine months of the year has reached 185.7 billion dollars, exceeding the total trade surplus of 177.47 billion dollars for 2006.
The huge forex reserve is considered the main reason for excess liquidity in China, as the central bank has to spend quantities of basic money to purchase foreign exchange, thus aggravating the problem of surplus fluidity.
……….
Rick,
Keep in mind that the chinese are sucking in USD by keeping their currency artificially low.
It is true that the US economy benefits through lower inflation and interest rates.
But at the end of the day, it is chinese economic policy that is dictating the rules of exchange between the two countries.
The chinese are accumulating USD reserves because whomever runs the country feels it is in their interest, not because anyone is shoving them down their throats.
In my view, they are in for more problems than the US. They have been growing at close to double digits now for 10-15 years, to the point where their economy is one of the largest in the world. Yet they do not have a market economy. Decision making is concentrated, information is not freely available, transparency is limited. They will run up against resource constraints and their economy will develop distortions, and they still do not have the institutions and the flexibility to make timely and efficient adjustments.
China just passed a new labor law which will improve the lot of its workers and correspondingly increase the overall cost of labor. I am of the strong view that foreign companies are greatly underestimating the impact this new law will have on its costs.