My assistant Oliver Shang tells me that the wholesale price of pork is up 1.9% in the last week, and has been trending upwards during the whole period since the last CPI release. He says that other food prices, including vegetables, are also up a little. What with this and the increase in gas prices two weeks ago I think people are expecting October CPI inflation to come in higher than August’s 6.5%.Some people are claiming that it will break 7%.I agree.
As an aside, according to Wednesday’s South China Morning Post, Cheng Siwei, vice-chairman of the Chinese People’s Political Consultative Conference, parliament’s top advisory body, said that Beijing needed to dampen international expectations that the RMB would keep rising.In the same speech he caused a stir when he said that China should “balance” its reserves between the euro and the dollar.
According to Cheng, this “mindset” – international expectations that the RMB would keep rising – was more dangerous than a stronger RMB itself.I think I understand why he is saying it, but I also think he underestimates how serious the RMB problem really is (and he can’t seem to resist the Chinese temptation to explain a domestic problem as somehow being caused by the “international” community).
To the extent that his is a common perception within the government, I think the outlook for policy isn’t good.If they believe that the “problem” of the RMB is not the impact of the currency regime on monetary policy but rather that China will be subject to damaging speculative inflows because of “international” perceptions that the RMB must rise, this may lead authorities to focus more on changing those perceptions by introducing volatility to the RMB’s appreciation, rather than adjusting the currency regime.
By the way his comments make me skeptical of claims by some analysts that speculative inflows caused by faster appreciation are not a serious problem.
Finally, according to another article in Wednesday’s South China Morning Post:
Premier Wen Jiabao has mounted a rare public defense of his macroeconomic policies, which have been criticised both within the Communist Party and overseas. In an uncharacteristically assertive manner, Mr Wen arranged an interview with a group of Hong Kong reporters yesterday during his visit to Russia. The premier said the criticism directed at his economic policies was ill-founded - the strong and stable growth vindicated those policies.
"Everybody agrees that China's economy has been doing pretty well for the past five years and actually it's one bright spot [in the global economy]," said Mr Wen, who has been in charge of the economy since 2003. "If that's the case, then to label [our] macroeconomic controls as ‘toothless’ contradicts both fact and logic." Mr Wen's management of the world's fourth-largest economy has been a subject of heated debate. Overseas media and analysts have said his macroeconomic controls have been ineffective in cooling the sizzling economy and run the risk of damaging the mainland's long-term growth
I have a lot of sympathy for Wen and think overall he has done a great job on a number of fronts, but I think managing the competing interests affected by economic and monetary policy isn’t easy and he is going to be criticized no matter what he does.The options facing China are pretty limited and not terribly enticing.Still, it is very interesting that he felt the need to defend himself while in the middle of his Russia visit.It suggests to me that there must be real nasty debate and even some internal strains, reaching all the way into Zhongnanhai, the leadership compound in Beijing.
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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October, 2007
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