On Wednesday Zhou Xiaochuan was interviewed by a newspaper published by the PBoC, of which he is the governor, in which he insisted that the PBoC would stabilize inflationary expectations, curb excess liquidity and pull real interest rates out of negative territory.One-year deposits at 3.87% and inflation for the past year has three months has been 6.4%. He also said, probably in reference to October’s seasonally high growth in credit, “We must implement appropriately tight monetary policies, continue to take comprehensive measures, improve and innovate in policy tools, and appropriately step up macro controls in order to maintain reasonable credit growth.”
I don’t want to read to much into these particular tea leaves, but from what Zhou has said and from what I am hearing elsewhere it seems to me that a number of recent issues have caught Zhou’s eye. First, most obviously, CPI inflation is not moderating, and there is reason to fear that it might be spreading.Second, the RMB 449.8 billion drop in RMB banking deposits in October may be indicating an acceleration of capital flows into the stock market – in part because of a few very large (and crazily successful) IPOs but also perhaps because of negative real interest rates. Third, new loans expanded by RMB 136.1 billion in October, which is an historical high for a normally very weak month. Clearly commercial banks are still eager and able to expand their loan books in spite of several minimum reserve hikes and lots of moral suasion.
Zhou has already said last week that the first priority of the central bank was to curb inflation and maintain price stability.Maintaining employment would take a back seat in monetary policy. Xinxin Li of the G7 group has this to say:
"- The PBoC is inclined to define the current problem as an overall inflation pickup, and the conclusion is it is a monetary phenomenon caused by accumulated effects of external imbalances and money supply growth…
"- By comparison, the National Development and Reform Commission (NDRC, the economic planning committee) still sees the CPI jump as a supply shock of food and commodities. By denying a full-scale inflation, the NDRC may have more flexibility to increase energy and utility prices, which are still heavily subsidized by the government. On November 1, the widespread shortage of diesel and gasoline finally forced the NDRC to increase the refined petroleum price by 10%.
"- The position of the National Statistics Bureau (NBS), another government agency capable of macroeconomic projection, is closer to the NDRC's view. It is quite optimistic on the inflation outlook and believes that the CPI will moderate gradually in H1'07."
The outcome of this policy disagreement is not at all clear in the short run.My guess is that the PBoC needs higher CPI inflation numbers to strengthen its case for speeding RMB appreciation, although another few months of record trade surpluses and increasing anger from the US and Europe may also do the trick.
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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December, 2007
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