Yesterday the China Daily published an interesting editorial on inflation that may indicate what the concerns are among at least part of the leadership. Here it is in total:
Early reports of shocking price hikes in areas hardest-hit by the bitter snowstorms might have made it relatively easy for the public to swallow a 7.1-percent consumer inflation in January. Given the severity of the supply shock caused by the worst snowy weather in at least half a century, a short-term acceleration of inflation at this level, though the highest in a decade, is still an acceptable result of the Chinese government's efforts to curb overall price rises.
Had the authorities not tried hard to increase food supplies and introduced stopgap price controls on a number of daily necessities before the snowstorms, the consumer prices may have gone through the roof. On back of a 6.5-percent headline inflation in December, it took a lot of endeavors to limit growth of the consumer price index to 7.1 percent in January when both snowstorms and the coming Chinese New Year were significantly pushing food prices up.
However, while they can breathe a sigh of relief for managing to cope with short-term inflation factors, policymakers should not stop fixing their eyes on long-term inflation.Aggressive price measures that the authorities have adopted will continue to take effect and thus slow price hikes in the near future. But the country's inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.
The acceleration in inflation has so far been predominantly driven by food. But that does not mean the current round of inflation will be short lived if the supply of food can be raised.While food prices surged by 18.2 percent year-on-year, non-food price inflation remained low at 1.5 percent in January. The slow rise in non-food prices is rather a source of increasing inflationary pressure than a reassuring check on further inflation.
The surge in producer prices which jumped 6.1 percent in January, the fastest growth in more than three years, indicates that rising energy and food costs are considerably pushing up manufacturing costs.
Besides, the enforcement of higher environmental and labor standards will add to companies' costs. Hence, non-food price inflation is already in the pipeline. The complexity of China's growth prospects this year makes it very difficult for policymakers to fight an all-out war against inflation. A tightening monetary policy is essential to preventing serious inflation. But it may also risk slowing the growth of the Chinese economy by too much as a US slowdown or recession weighs increasingly heavily on the country's export sector.
The policymakers should certainly be forward-looking and prepare for the possible downturn.
Yet, an inflation rate above 7 percent currently warrants more concerns over entrenched inflationary pressures than worries about a temporary farewell to double-digit economic growth.
I think there are at least two very interesting points about this article (besides the fulsome but perfunctory praise about how well the authorities have handled the inflation problem so far).First, the author seems less than confident that inflation is merely a short-term food problem.Clearly he is worried that the inflation genie has already been let out of the bottle and that inflation is spreading to other parts of the economy.
Second, he acknowledges the complexity of the economic issues surrounding financial policy-making, but he says emphatically that “the country's inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.”As I understand it, “structural imbalance” almost always means the currency regime and the associated monetary consequences.I am not sure what “properly and promptly” mean, but interest rates have been rising, reserve requirements have been rising, and the currency is appreciating more quickly.Either he means something else must be done, and soon, or he is arguing that the recent hints of a policy reversal (actually a lot more than just hints) are ill-considered and Chinese policy-makers must go back to the grim spirit of the October Economic Conference.
Either way I read this as suggesting that the internal policy debate is fierce and far from resolved.
This is certainly a fast turnaround. According to a survey carried out by the National Bureau of Statistics at the end of last year asking 100 economists how they felt about the economy, fully 64% thought that only structural inflation would occur while on 9% predicted comprehensive inflation. The Chinese government needs to find some new economists and put Yu Yongding in charge. Or better yet, Michael Pettis. http://www.caijing.com.cn/econcomm/2008-02-03/47623.shtml
Only 16% ventured that it would overheat. http://www.caijing.com.cn/econcomm/2008-02-03/47622.shtml
By orgulous - 2/20/2008 9:59 PM
Thanks Orgulous, but I would hate to be put in charge. The problems they are facing are very complex and not at all easy to resolve. Better to watch from the sidelines, and a lot less stressful.
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.
Subscribe to this Site
Comments (2) for "China Daily on inflation"
December, 2007
.