News seems to have slowed down considerably over the past few days as we wait for the March inflation numbers to be released.This may be because Wang Qishan is still reportedly going through the numbers, and speaking to the various ministries and experts, trying to get a feel for what is really going on in China and what needs to be done.As the rumored new economic czar, the various factions with different explanations and perceptions of what ails China are waiting for him to decide before, presumably, they agree or disagree.No major legislative activity seems to be taking place.
Needless to say a lot of the focus will be on inflation and on how bad it is.A while back the more daring among us (e.g. Logan Wright at Stone & McCarthy) were warning that March year-on-year inflation was likely to come in at 8.1%.By late last week the consensus had moved all the way there and, as I wrote on my April 4 entry, even a big bank like ICBC was forecasting inflation to come in at 8.2%.
I have now had two different reliable people tell me that they are hearing rumors that it will come in at 8.3%.If that turns out to be true, and these rumors have been pretty accurate in the past, it will mean prices declined by 0.7% in March after jumping 2.5% in February.It will also imply an annualized 13% inflation for the first quarter of 2008, versus 8.5% and 9.2% annualized inflation rates in the fourth and third quarters of 2007, respectively. However you look at it, inflation seems indeed to be accelerating, and at a pretty rapid clip.For me the most interesting question will be the breakdown between food inflation and non-food inflation.By the way I understand the March inflation numbers don’t come out this week as I originally expected but rather next Thursday.
Besides the sudden 5% drop in the stock market after a good morning and several good days, the only interesting news seems to be the announcement of changes in the rules governing QFII.According to today’s Xinhua:
The State Administration of Foreign Exchange (SAFE) is revising rules concerning restrictions on QFII money, and may cut down the lock-up period required before QFII money is allowed to invest in the mainland market, the financial website Hexun quoted SAFE deputy head Li Dongrong as saying on Tuesday. No timetable for implementation of the reforms was given, nor were further details of how it would be carried out released.It would be another major move in China's plan to further develop its capital market through the introduction of QFII system since 2002, after the regulator tripled the investment quota from $10 billion to $30 billion in December last year, analysts said.
As far as I can tell this is not so much to create further capital inflows (which the PBoC would hate to see), even though it might provide the stock markets with a much-needed boost, as it is a move to make it easier for QFII investors to take their money out of China.I also understand that the new rules also mean that QFII inflows cannot be converted into RMB until just before the targeted securities are purchased, so as to reduce the temptation to let money sit in a bank account and enjoy the RMB appreciation.
Speaking of appreciation, today Zhu Baoliang, chief economist at the State Information Center, a think tank under the NRDC (China’s powerful planning agency), wrote an article in China Securities Journal, the official securities newspaper, saying that China had to speed up the rate of appreciation.He said this was needed to combat inflation.Interestingly enough the same newspaper had a front-page commentary arguing that China needed more than just currency appreciation to control inflation.
China Securities Journal is not the formal voice of government policy, but it does have the reputation of reflecting official opinion, so I assume that it must also be reflecting the ongoing debate about how aggressively the currency must be managed to deal with inflation.What does Mr. Zhu mean about a faster rate of appreciation? Since the RMB is already appreciating fairly quickly, I suppose it might be code for a one-off revaluation.
I think one has to be careful about interpreting things in the Chinese press. Often its impossible for the press to reflect "official opinion" because there is no official opinion, and what you see posted are people trying to have a rational debate on an issue. What you can see often is the content and limits of the debate.
The one clear thing about the CSJ post is that it means that a one-off reval is on the table as something at least to be discussed.
I am from India, and it is interesting to see the similarity between the issues in the two countries - a significant tick up in inflation and a very high degree of reluctance in giving up growth - domestic via higher rates or export via a currency appreciation.
In India inflation is more widespread than Chine - its significantly elevated in manufactured products, not just food. In both countries there seems to be a view that waiting and using tariffs, export controls and price regulation will make inflation go away in time. In both countries oil prices are regulated and at present subsidized.
Looks like being an interesting year ahead for both countries.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "Inflation consensus is inchi...
- 4/9/2008 5:38 AM
October, 2007