From Reuters via today's South China Morning Post, this article doesn't need much comment:
Officials in Fujian province have told schools to caution students against dabbling in the stock market, warning that failed investments could fuel social instability. Students have followed pensioners, housewives and people from all walks of life into the stock market as prices have rocketed in recent months, despite experts’ warnings of a dangerous bubble.
"Local education departments and schools must instruct students to think twice before investing in highly risky stocks," the Beijing News said, citing a government notice in the southeastern coastal province of Fujian. "[The regulation] is to prevent failed investments from affecting family and social stability," it added, warning students not to see the market as an easy way to make a living.
Teachers had a responsibility to help their students get a "correct view" about the stock market, the report said. Financial officials have expressed concern the market may be overheating and warned the public to be careful about letting go of their money.
PPI for August is up 2.6% year on year, versus 2.4% in July, driven largely by steel products and coal-mining -related costs. This is not a particularly high number, but the trend is in the wrong direction and it doesn't do much to comfort those of us who are worried that the recent high food prices might be augmented by other factors in keeping inflation high for a at least few more quarters. Tomorrow we get CPI numbers for August, and the consensus is that prices will have increased 5.8%, versus 5.6% in July.
So much for expectations. CPI for the month of August came in at 6.5%, well above last month's 10-year record of 5.6%, and also well above market expectations of 5.8-5.9%. This is the highest monthly CPI number since December 1996.
I have been a pessimist on inflation but I was still surprised that CPI inflation came in as high as it did. I think it is going to be tough to keep this from affecting wage increases, and inflationary expectations generally are likely to become self-reinforcing.
As expected, most of the increase was in food prices, which were up 18.2% and account for over one-third of the CPI basket. I am not sure how the food price increases will initially play out for Chinese consumers, but it seems to me that there are only two possibilities. They will pay for more expensive food either by reducing savings, or by reducing purchases of discretionary non-food goods (or of course some combination of both). The former would of course do less damage to the economy, although it might put a little liquidity pressure on the banks. The latter would not only shift domestic consumption, but it might also result in a little bit of upward pressure on the trade surplus as consumer goods not purchased (or imported) by Chinese would now be exported.
Just to give a sense of the numbers, if we assume that Chinese consumers spend 18% more on the roughly one-third of their consumption that consists of food, and if we assume that a further one-third of the basket consists of non-discetionary items (rent, education, medical bills, etc.), and finally we assume that as much as one-half of the increased food bills come out of savings, that means that the amount of money spent on non-discretionary non-food consumption must decline by roughly 10%. These numbers are just my best guesses, by the way, and not based on data.
My back-of-the-envelope estimate is that this represents a reduction in demand for those items of about 1-2% of GDP. At least part of this will probably show up in an increase in the trade surplus, which is currently running at roughly 10% of GDP.
I think it is pretty certain that the latest CPI numbers, unless they come down dramatically over the next two or three months (I am skeptical) must result in upward pressure on interest rates. The PBoC has already said that they want to see positive real rates.
But of course there is a problem with raising rates. If we assume that deposit rates migrate up to around 5%, the combinaton of deposit rates and an expected appreciation of the RMB of 5% anually means that depositing money in a Chinese bank will earn 10% in dollar terms -- a pretty hefty yield even for most hedge funds, especially since it requires no special expertise or instruments with which to do it.
I know that there are disagreements about the extent of hot money inflows, but I find it hard to believe that rising rates won't have an impact. As crazy as it seems, reserve growth may actually accelerate in the coming quarters.
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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January, 2008
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