Certain regions in China are experiencing shortages in diesel fuel.I heard first from my students and then in the press that in parts of coastal China gas stations are rationing the amount of diesel they sell.This often happens when price controls clash with underlying inflation – instead of showing up in higher prices, inflation shows up as shortages.
I believe that the last time gasoline prices were set by the authorities, oil was trading around $60 a barrel.Unless oil prices drop substantially in the near term I would expect that there might be pressure on the government to let gasoline prices rise, thereby showing up in the non-food component of CPI inflation.Perhaps more worrying, to see inflation spread from food to transportation may lead to a rise in inflationary expectations.All eyes will be on October inflation numbers, which I believe should be released in less than two weeks.
Gasoline prices have always been set by administrative means. When oil prices are low, this results in windfall profits for the oil companies. When prices spike, there are shortages. I think everyone realizes that this system results in these sorts of problems, and the government has been trying to relax administrative pricing, but when prices are low, no one notices or cares, and when prices spike, letting oil companies raise prices is unpopular.
One thing that does concern me is that I've noticed that energy and food prices increasing in the United States. This concerns me because if the inflation were a China-only situation, then inflation in China but not the United States would tend to bring the currency back into alignment. If you have inflationary pressure in both the US and China, then it won't.
I have just written a small piece on the fuel issue and linked to your blog as one of the first places that I read about this story (way ahead of the FT).
I hope this is OK.
This is a potentially important topic and with the Olympics just around the corner this is publicity that China do not need. The economics of price controls on this level are also interesting and is something I hope to get round to posting on soon.
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 "Hidden inflation?"
- 10/31/2007 10:49 AM
October, 2007