The CPI numbers have come out and they are a lot worse than expected, and this should give us reason to worry. I think the consensus was for CPI to come out to just under 5%, from 4.4% in June, although three days ago I had already heard the 5.6% number being bandied about. This is the highest monthly number recorded since February 1997.
Most of the inflation occurred in food prices (non-food items were up only 0.9%), and so once again we are being told by an army of analysts that this is temporary and will soon reverse itself. I suspect however that the same mistakes are being made about the supposed temporary nature of the series of record-breaking trade surpluses over the past three years. In both cases I think they are the consequence of excess monetary growth, and so are a lot less temporary than we think (although of course the standard suspects also matter in the case of CPI -- livestock diseases and food shortages).
At any rate if these rises persist, whatever the cause, the consequences will be destabilizing for the banking system if the price increases put pressure on depositors to find alternative ways of maintaining the value of their savings, or if the driving of real rates deeply into negative territory encourages (further) overinvestment.
By the way there is reason to believe that the CPI number understates the non-food component of inflation. Energy and power prices are subsidized, so we effectively have taken some payments out of the "inflation" box and put them in the "taxes" box, but the net effect on disposable income is ultimately the same. I believe rents are not correctly included in the CPI number. And finally, Stephen Green, of Standard Chartered bank, was reported to have said, according to today's FT,that "Anecdotally, some local governments are said to be under-estimating various price trends, and there is scepticism that service sector inflation is being accurately captured.”
It is always hard to prove that monetary growth is excesive, but China is now exhibiting nearly all the expected consequences of excess money -- explosive lending growth, asset bubbles, overinvestment and inflation. In a recent article in China Securities Journal Zhang Tao, vice head of the international department at the PBoC, was reported to have said that “Economic growth is overly fast and it has been so continuously,” and he warned about rapid rise of gross domestic product, fixed-asset investment, inflation and lending, saying that they “may have entered a dangerous zone”.
Usually, disagreement involves not specifics but assumptions. I do not believe the Chinese are attempting to create a market or capitalist economy, but an alternative to capitalism which they call "social market economy with Chinese characteristics." I know these are fuzzy etc, but it seems to me an important assumption and I wonder where you come down. (Thank you for answering thoroughly and quickly my earlier questions.)
By dan berg - 8/12/2007 9:15 PM
I am not sure that there is an economic blueprint so much as a series of attempts to deal with problems as they arise, always keeping in mind the main problem. My standard story to investors is that we are tearing down the road in a rickety car, and those of us in the back seat are pleading with the driver to slow down so we can fix the car, but the driver is looking out the rearview mirror and sees that we are being chased by an axe-murderer, and so he won't slow down. The axe-murderer is unemployment.
By Michael Pettis - 8/13/2007 1:10 PM
Apt metaphor and I agree that they tend to solve problems after they emerge (a housing bubble here, too many exports there) rather than implement broad macroeconomic policies - maybe raise interest rates. But you dodge the question. I keep reading about how China is moving inexorably towards a market economy: I do not think that is true and find very few people agree with me. I think it's an important assumption and I'm still curious what you think.
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 (3) for "CPI hits 5.6% for July"
January, 2008
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