My Blog

March 16, 2008

SUN 16 MAR

Fuel shortages, inflation, unemployment, and sundry matters

Hong Kong’s The Standard has an article today entitled “Fuel price worries as rationing spreads.”  According to the article:

 

Fuel rationing begun in Hainan over the weekend has spread quickly across huge swaths of southern and eastern China, leading to speculation the mainland government will raise retail fuel prices within two weeks to put an end to the mounting chaos.  Guangzhou, Shenzhen and Haikou in the south, as well as Fujian province and the city of Ningbo in Zhejiang province have been affected by severe rationing of diesel and gasoline, according to mainland media.  

 

I wasn’t aware of this and have not seen it confirmed elsewhere, so I don’t know how seriously to take it, but of course it wouldn’t be surprising if the heavy subsidy on fuel prices led to shortages (I think fuel is effectively sold within China at around $45 a barrel).  If the reports are true, and if fuel prices are raised, needless to say the higher prices will show up as CPI inflation in March’s or April’s numbers. 

 

For those of us on the monetary side of the debate, by the way, raising fuel prices does not create inflation so much as recognize inflation that has already taken place but not been recorded.  Basically the subsidies convert higher current fuel expenditures into higher current tax payments or higher current government borrowing (which represents higher future tax payments).  The price impact is felt by consumers, only it doesn’t show up in the CPI numbers.

 

How might the PBoC deal with all this?  Yesterday Zhou Xiaochuan, governor of the PBoC, told reporters at a press conference marking the end of the NPC that “There is room for all monetary policy tools, including rates and reserve ratios.”  A lot of commentators are taking this to mean that in fact the PBoC will continue raising interest rates in order to cool down the economy. 

 

I have no idea whether or not this interpretation is correct (the price of government bonds haven’t seemed to change much), but as I have often said I don’t think raising rates will have much effect on inflation which, in my opinion, is a consequence of the currency regime, not low domestic interest rates.   According to the China Daily Zhou did admit that “It is too early to say monetary policy has succeeded in cooling credit and money-supply growth,” and I suspect that even after several more months we will still see that “monetary policy” (but how can we speak of “monetary policy” in China?) has had little real effect on inflation, although raising interest rates may have an effect on slowing overheating by creating bankruptcies.

 

At the same press conference Wu Xiaoling, a former vice governor of the PBoC, acknowledged that loan growth may top a government target for the first quarter of this year.  That is not much of a surprise – I discussed the January and February loan numbers in my posting on Thursday.  By the end of February we were already at 83% of the quarterly target – and this after a very slow February.

 

During the past week RMB appreciation has speeded up (up 0.4% so far this month), and the amount of noise coming from both within and outside China on the need to speed up appreciation has increased. It is almost an article of faith to me that all of this will have sped up hot money inflows.  In fact I expect that in the next few weeks the government will announce new steps to prevent hot money inflows – this is not based on any inside tips but just on what I see as the logic of the situation. 

 

If they happen these new steps will probably have an immediate short-term impact, but I doubt they will much matter beyond a few months.  The incentive to bring money into China is getting better all the time.  By the way over the weekend I met an old friend of mine who is relatively senior in the PBoC/SAFE/MoF world (I don’t want to be too specific), who said over drinks that the option of a one-off revaluation was, in his opinion, a very likely one.  He was not part of the foreign currency department of the PBoC, nor was he speaking in an official capacity, so his opinions don’t matter for policy, but nonetheless I do think it is interesting that someone in his position believed that China would have to consider a one-off revaluation.  Clearly the policy is not seen by everyone as totally unlikely.

 

I also note that China's trade surplus is expected to rebound beginning in March after a sharp year-on-year decline in February, the China Securities News reported, citing Commerce Minister Chen Deming.  According to China Daily Chen was quoted as saying that the sharp decline in exports in February was a one-off because many companies front-loaded their exports to ship before the lunar New Year.  Reserve growth already seems to have been very high so far this year.  A pick up in hot money and in the trade surplus will do nothing to bring this down.

 

On a separate note last week I posted an entry about the number of people joining the job market in China.  A few days ago People’s Daily had the following article:

 

Grim employment prospects: 24 million people competing for 12 million positions

 

Tian Chengping, Minister of Labor and Social Security, said on March 9 that there are 24 million job-seekers in cities and towns every year, including the new additional urban workforce and the people carried over from the previous year who did not find work. But there are only a little more than 12 million jobs available in cities and towns every year. Approximately 8 million additional rural laborers move into cities and towns every year; and this phenomenon will continue for quite some time. The current employment situation remains grim.

Tian Chengping said that in the future, we should promote employment in six ways that include regulating and controlling unemployment; establishing an early warning system for unemployment; and making efforts to maintain stable employment conditions.