Kobain Wang, one of my former students and a trader at ING, sent me the following today:
BEIJING, Aug 22 (Reuters) - Drought and floods in China are likely to cut the country's autumn crop by 10 percent from usual levels, sparking fears of further price increases and higher inflation, the China Daily said on Wednesday. The expected drop in the autumn crop, which accounts for 70 percent of the country's total crop, would lead to a 5 percent cut in overall production, the newspaper quoted Song Tingmin, vice-president of the Chna National Association of Grain, as saying. On Tuesday, vice premier Hui Liangyu urged the country to do everything possible to maximise the autumn grain harvest, despite natural disasters that had affected production in some areas.
Dong Tao at Credit Suisse (see entry below) has been consistently bearish about inflation prospects, having warned a few weeks ago that food prices in China are going to be a problem through the rest of this year and probably into 2008. So far, it looks they his call is going to be good. I am speaking from memory, but I believe that he said CPI inflation could be as high as 8% next year.
While analysts argue back and forth about whether this is a "real" problem or just a temporary one (core inflation is still low, at around 0.9%), I would suggest that if Tao is right this is a real problem even if the problem stays localized in the food sector. There are at least two reaons for concern.
First, obviously, high food prices coupled with wage pressures in many parts of China could start a cycle of inflationary expectations that could push prices up more permanently. Independent unions don't really exist in China, and so the negotiating strength of workers is weak, but given all the money creation of the past three of four years it is easily possible that a good inflationary push could quickly become self-reinforcing as workers "negotiate" for higher wages by refusing to leave the farms to join the urban and industrial labor force. By the way, in discussing the recent inflation I often hear analysts say that at least food inflation is good for farmers because they get higher prices for their products. Remember, however, that prices in China are high because diseases and natural disasters have sharply reduced the amount of product they can sell. Total farmers income are going down, not up.
The second concern is that with inflation rapidly outstripping the rise in the deposit rates and staying high for prolonged periods, the incentive for savers to withdraw their funds from the banking system is rising. Savers can use the money to accelerate their purchases of goods, which is one way of protecting the value of their savings, or they can use it to earn higher returns in the stock and real estate markets. The former spreads inflation from the food sector to other sectors, while the latter increases the riskiness of the fnancial sector.
http://www.ers.usda.gov/AmberWaves/June07/Findings/Chinese.htm or USDA Long-term Projections, Fed 07: China is projected to increase imports of wheat, corn, soybeans, cotton dramatically. With increasing demand for ethanol the prices of all of these crops should rise.
By dan berg - 8/21/2007 10:49 PM
yes, rite, he said 8%, ppl were talking about that research by Dong Tao, but mkt didn't react at all on that report
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 "More on agricultural inflation"
December, 2007
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