Tom Holland has a good piece in today's SouthChinaMorningPost warning about the impact of inflation. He writes:
...That means although food inflation is not yet spreading into other sectors, it could begin to soon. People will adjust their expectations of future inflation upward in response to higher food prices, and start demanding higher wages. That will push business costs up, and eventually result in higher prices. If there are strikes and demonstrations, rising food prices could lead to social friction.
At the same time, there are signs that price pressures may neither be temporary nor confined solely to food. Demand is rising for protein-rich and therefore resource-intensive foods just as agricultural land is being turned over to growing crops for biofuels and for industrial use.
Transport costs are rising, and both energy and water costs look set to climb as subsidies are reduced. The current focus on food safety - mainland officials claim they have shut 2,000 food-processing plants in the past three weeks - will inevitably add to production costs. Elsewhere, costs are also rising. According to Jing Ulrich, chairman of Chinese equities at JP Morgan: "Inflationary pressures are also building in the manufacturing sector, where the costs of land, labour, raw materials, utilities and pollution are on the rise"...
Compare this article to MorganStanley's China guy (sorry, forgot his name); interesting article in new Far Eastern Ec Review; and world grain prices have doubled. Maybe it's just me, but it looks like a perfect storm brewing.
By dan berg - 9/11/2007 8:25 PM
China probably have had a similar period but with relatively more mild increasing of CPI, driven by CPI of food like today, from Q2 2003 to Q3 2004. Lasting for one year and controlled finally.
The question here is how far would the revaluation of argriculture products, relatively undervalued for years due to developmental reasons, affect other factors. To my view, after a periodic adjustment maybe last for another 0.5 to 1 yrs, the trend would stop; monthly CPI change % falls from the peak in the late of second half, as PPI & CPI of non-food kept flat for and no evidence tells me they will follow to soar up in short time.
By Oliver - 9/12/2007 1:25 AM
Olliver, there at least two differences between the current period and the 2003-04 period that may or may not make a difference. First, as Dan Berg notes, food prices have shot up not just in China but in the whole world.
That means that there is likely to be less relief from abroad -- China cannot simply import cheap food to keep prices down. Second, although I think China has been running an excessively expansive monetary policy for many years, it has really been in the last two to three years during which the expansion has accelerated to alarming levels.
To date this expansion has been deflationary because it showed up primarily in the form of overproduction, but it is not completely clear to me what the impact of several quarters of high inflation may be on a system flush with money. I am not saying that, once ignited, inflation will take off -- just that I honestly don't know, and can make plausible cases for either direction.
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 "Tom Holland on inflation"
October, 2007
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