Just a very quick post today, largely consisting of two news articles.The first comes from Xinhua.
Yesterday, according to the article, Li Yining, a leading economist and member of the all-important Standing Committee, told the Second Meeting of the Standing Committee of the 11th NCCPPC, the country's political advisory body, that:
China is facing a pressing challenge of preventing inflation turning into stagflation.He said stagflation, the co-existence of high unemployment and high inflation, might occur if improper measures were taken to fight inflation so as to disrupt market expectations, or the economy failed to survive the global slowdown…
The economist said China should continue to take a firm grip on the country's foreign exchange flows, and be alert to problems that might occur in the context of a global slowdown given the huge forex reserves.
He said the government should not over-reach itself in fighting inflation or be misled by the concept that only a low inflation rate would be a complete success in the anti-inflation campaign. "The inflation rate, if controlled at about 60 percent of the growth rate, would be appropriate, such as keeping the rate at around six percent for a 10-percent growth in economy," he said.
I don’t have an awful lot to say about his comments except that his warning of stagflation risks is even more interesting to me because of the play it got in the Chinese press (The very large headline is “Economist warns of stagflation risks to China”).
The second article, first pointed out to me by blog reader Jonathan Lerner, appear in various forms in a wide number of papers. The best account I think was Denise Tang’s “State academics push temporary yuan free float” in the South China Morning Post.She says:
China should temporarily let its currency float freely to control runaway inflation and speculative capital inflows, said two government-backed academics, rekindling the debate on the politically sensitive issue. He Fan and Zhang Yue of the Chinese Academy of Social Sciences see the temporary free exchange of the yuan as a quick and cost-effective way to thwart speculation, especially as inflation rises and the room to tighten monetary policy shrinks, according to their commentary in China Securities Journal yesterday.
The government think-tank academics painted a gloomy picture for inflation in consumer and producer prices, and they warned of a cash crunch at companies as well as a possible jump in banks' non-performing loans as side-effects of existing currency measures.
As Jonathan points out in his email to me, major policy changes, especially on economic and financial issues, are almost always preceded by non-official or quasi-official commentary and debate in the official press.That doesn’t mean, of course, that they are about to float the RMB, but it does mean that there is some discussion and debate going on in policy circles about what is, after all, a pretty sensitive topic.I would assume that academic researchers with CASS are unlikely to propose something that seems so radical without some sense that there are people in the government willing to listen.
I don’t want to read too much into this, but if we see more articles along this line it would be significant. By the way, one way of interpreting the debate about a free float is in the context of the debate over a one-off currency revaluation.The more extreme idea of a free float may make it easier to reach a compromise position on the amount of revaluation necessary.
Re stagflation, I wonder how the Chinese government defines the "stagnation" part of the equation? In Western economies we'd probably say that GDP growth of 2% or less would be an indicator of economic stagnation. Surely the Chinese govt doesn't see this in store for their economy. So are they suggesting their economy is stagnant if it "only" grows by 5-6%?
Stagnation is generally defined as rising unemployment. Xinxin Li of Observatory Group has suggested that 10% GDP growth is, broadly speaking, the growth rate at which unemployment stays constant. For a while the consensus has been that anything below 8% GDP growth is a real problem.
By Michael Pettis - 7/4/2008 7:12 PM
One important note. Li Yining is a member of the Standing Committee of the National People's Congress and not the Standing Committee of the Politburo, and I wouldn't characterise the NPCSC as "all important." The weight of his remarks would be roughly the same as the remarks of a member of the US Senate Finance Committee. Interesting, but nowhere near the amount of weight that is sometimes given to these remarks. Monetary policy is an issue which there aren't many political constraints on discussion, and so the fact that different ideas make it into the press is sometimes given much more weight than then is warranted.
Also the fact that there is an intense debate on what to do is not news. There has been a constant debate on the topic of monetary expansion/contraction since 1978, and it's likely that this debate will continue for the next few decades. Victor Shih has written a new book in which he argues that the Communist Party economic policy can be viewed in terms of a a tension between "pro-growth" groups and "monetary stability" groups and the tension between these two groups has driven the credit cycle since the 1970's.
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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, Li Yining, a leading economist and member of the all-important Standing Committee, told the Second Meeting of the Standing Committee of the 11th NCCPPC, the country's political advisory body, that:
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December, 2007