Announcement

Collapse
No announcement yet.

Inflation in China

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Inflation in China

    llar Advances as China Interest-Rate Increase Sparks Demand for Safety
    By Yoshiaki Nohara and Monami Yui - Dec 26, 2010 9:07 PM PT

    Dollar Advances as China Interest-Rate Increase Sparks Demand for Safety - Bloomberg

    Dollar Advances on Growth Concern After China’s Rate Increas

    Sheets of one hundred dollar bills wait to be cut into singles at the Bureau of Engraving and Printing in Washington. Photographer: Andrew Harrer/Bloomberg
    Hillier on Investment Strategy, Dec. 22

    Play Video

    Dec. 22 (Bloomberg) -- Piers Hillier, chief investment officer at Liverpool Victoria Asset Management, talks about the outlook for Japanese equities and his investment strategy. He speaks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)

    The dollar was near a three-week high against the euro after China’s second interest-rate increase since mid-October highlighted concern that efforts to tame inflation will curb global growth.

    The yen earlier touched a three-week high against the euro as JPMorgan Chase & Co. and Morgan Stanley said China’s monetary tightening in 2011 may be mainly in the first half as officials tackle the fastest inflation in more than two years. The dollar was also supported before data forecast to show U.S. consumer confidence advanced. Asian currencies halted gains as China’s rate increase damped the outlook for spending in the No. 1 export market for South Korea, Malaysia and Thailand.

    “Reaction on China’s move has been somewhat muted, still the dollar is being supported against the euro,” said Kazuyuki Kato, treasury department manager in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-biggest bank. “Investors are not willing to take risk, as the market is thin near year- end.”

    The dollar was at $1.3127 per euro as of 2:02 p.m. in Tokyo from $1.3122 last week. It touched $1.3055 on Dec. 23, the highest since Dec. 1. The yen was at 108.81 per euro from 108.77. It earlier reached 108.43 per euro, the strongest since Dec. 1. The dollar fetched 82.89 yen from 82.88 yen.

    The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.

    China’s benchmark lending rate rose to 5.81 percent, compared with 7.47 percent before cuts from late 2008 to counter the global financial crisis. It will climb to 6.56 percent by the end of next year, according to the median forecast in a Bloomberg News survey of economists this month.

    Rate Increase

    The deposit rate increased to 2.75 percent, compared with the 5.1 percent annual pace of inflation in November.

    China may raise rates as many as three times in the first half of next year, according to Morgan Stanley, while JPMorgan forecasts two increases in that period.

    “You don’t expect rallies in the ringgit or Asian currencies for that matter,” said Vishnu Varathan, an economist at Capital Economics in Singapore. “The fact is the PBOC rate hike has been a long time coming. You were either betting on a very late hike this year or the moment the year turns.”

    Asian Currencies

    The Bloomberg-JPMorgan Asia Dollar Index slipped 0.1 percent to 115.24, having ended last week at its highest closing level since Nov. 18.

    The yen has gained 12 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The euro has dropped 10 percent, while the dollar is down 1.4 percent.

    The dollar and yen erased earlier gains against the euro as advances by Asian stocks countered growth concerns following China’s rate increase.

    China’s officials “won’t do anything to destroy economic growth,” said Keiji Matsumoto, a currency strategist in Tokyo at Nikko Cordial Securities Inc. “Impact has been very limited on currencies, since it happened when investors don’t want to move a lot near year-end. They will start pricing in further possible actions once they enter next year.”

    The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, advanced 0.7 percent.

    The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, was little changed at 80.438.

    Christmas Sales

    The yen typically strengthens in times of financial turmoil as Japan’s trade surplus makes the currency attractive because it means the nation doesn’t have to rely on overseas lenders. The dollar benefits as the world’s main reserve currency.

    The Conference Board’s U.S. consumer confidence index increased to 56.4 this month from 54.1 in November, according to the median estimate of economists surveyed by Bloomberg News before the data tomorrow.

    “Investors are paying attention to the consumer confidence data to get any hint on economic prospects, as it reflects the trend in Christmas sales,” said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company. “A positive number will likely push the dollar higher.”

    The greenback gained 0.1 percent to $1.0035 versus the Australian dollar. It strengthened 0.2 percent to 74.81 U.S. cents per New Zealand dollar. Markets in Australia and New Zealand are closed for public holidays today and tomorrow.

    To contact the reporters on this story: Yoshiaki Nohara in Tokyo at [email protected]; Monami Yui in Tokyo at [email protected].

    To contact the editor responsible for this story: Rocky Swift at [email protected].
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  • #2
    China '11 Inflation Growth Likely At 4%-5% - Report

    SHANGHAI (Dow Jones)--China's consumer price index is likely to rise 4%-5% in 2011, the state-run China Securities Journal said in a commentary Monday.

    China will continue to face hefty inflationary pressure next year although December CPI growth will likely slow down temporarily, the newspaper said.

    China's consumer price index rose 5.1% in November, the biggest increase since July 2008. China has raised its inflation target to around 4% for next year, a full percentage point higher than this year's target of 3%, Zhang Ping, the head of the National Development and Reform Commission, said earlier this month.

    On Saturday, China raised interest rates for the second time in slightly over two months in a bid to contain the soaring inflationary pressure.
    2010/12/27 08:29 - China '11 Inflation Growth Likely At 4%-5% - Report
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

    Comment


    • #3
      China's Wen seeks to assure public about inflation

      The Associated Press: China's Wen seeks to assure public about inflation

      BEIJING (AP) — Chinese Premier Wen Jiabao tried Sunday to reassure the public about the government's ability to control inflation, a day after China raised interest rates amid worries that rising prices could hurt social stability.

      Wen's remarks underscore the government's concerns about anger over inflation — an especially sensitive topic in a society where poor families spend up to half their incomes on food. Rising incomes have helped offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power.

      "I can tell everybody, the government has complete confidence in tiding over this difficult stage together with the masses," Wen said while taking questions from callers during a visit to China National Radio's offices, according to a report on the station's website. The callers were not identified by name.

      Wen expressed confidence in the government's ability to control price increases, pointing to large grain reserves as well as moves to support production by reducing and waiving taxes.

      He also mentioned the government's twice raising interest rates and hiking the banks' reserve requirement ratio — meaning they have to hold more deposit funds in reserve rather than lending them out — six times this year to curb lending.

      Wen also pledged to focus more efforts on easing home prices, acknowledging that measures taken this year had not been well implemented.

      The government will work to increase the supply of affordable housing and will strictly control speculation in property, he said.

      "I believe after a period of efforts, housing prices will be back to reasonable levels. I have such confidence," he said.

      Wen, the leadership's most popular figure, also sought to demonstrate that the government recognizes the problem.

      Responding to a listener's laments about rising prices, Wen said: "Your words hurt my heart. Indeed, in recent times prices have risen across the nation, and under these circumstances, the lives of middle- and low-income earners are evidently more difficult."

      The State Council, China's Cabinet, has been trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. Authorities are cracking down on hoarding and speculation they say are partly to blame for the price rises.

      Inflation jumped to 5.1 percent in November, a 28-month high, despite a crackdown on speculation and repeated moves to curb a flood of money circulating in the economy from massive stimulus spending and bank lending.

      On Saturday, the government announced that the benchmark one-year lending rate will climb 25 basis points to 5.81 percent, while the one-year deposit rate will go up the same amount, to 2.75 percent — effective Sunday.

      Chinese banks lent a total of 7.45 trillion yuan ($1.1 trillion) in January-November and are certain to overshoot the government's official 2010 lending target of 7.5 trillion yuan.

      A frenzy of lending over the past two years has helped China rebound quickly from the global crisis but, combined with bad weather and rising global commodity prices, has also complicated efforts to cool inflation.
      “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

      Comment


      • #4
        Chinese stock is at 3 months low....


        http://blogs.reuters.com/george-chen...-war-in-china/
        Inflation, the new civil war in China
        Dec 28, 2010 01:17 EST


        By George Chen
        The opinions expressed are the author’s own.

        Mao Zedong led his Communist comrades to defeat the Chinese Nationalists in a civil war, founding a “new” China in 1949. Today, the Hu Jintao administration is fighting a new civil war and the enemy is inflation.

        Beijing announced the latest interest rate rise — the second of 2010 — on Christmas Day, effective on Dec. 26, also the birthday of Chairman Mao. I suspect, central bankers in Beijing didn’t really want to celebrate the Western holiday, they just wanted to give the market a surprise Christmas gift.

        I asked some friends in the financial industry if the rate increase was a surprise. The responses were very mixed. The 0.25 basis point increase for the benchmark deposit and lending rates was a sort of uniform move. If the central bank had gone for a 50 basis point rise, that would have been a very big surprise. The timing of the increase was a surprise, especially after Beijing raised bank required reserve ratios about a week earlier.

        We thought Chinese officials also needed a break after a very busy month but they have proved themselves to be unpredictable once again, not to mention tireless.

        Just one day after Beijing raised the interest rate, Hu Xiaolian, deputy governor of the People’s Bank of China, published an article on the PBOC’s website, saying the central bank would make good use of a combination of monetary policy tools next year, including interest rates, bank reserve ratios and open market operations, to make interest rates more market-oriented. How often will these tools be implemented? She didn’t say in the article, but now many analysts are predicting the next rate increase could take place in two or three months — within the first quarter.

        Clearly, China has entered a new cycle of rate increases.

        Many economists believe the newest rate rise shows Beijing’s determination to curb inflation, giving that task greater priority than maintaining economic growth. Some analysts also said the cabinet and some ministries were finally on the same page for tackling inflation after earlier disputes over how to balance the interplay between GDP and CPI.

        To be honest with you, I am not a big fan of interest rates. If you really rely on interest rates to improve living standards, it’s almost like living in a daydream. Hong Kong broadcaster TVB interviewed some residents of nearby Guangzhou city after the announcement of rate rise. Most of them said the move and even the prospect of more interest rate increases in 2011 would not do much to help them feel better about inflation, which is rising much faster than the pace of rate rises.

        Can Beijing raise interest rates once a month? I don’t think so. Will inflation continue to rise above 5 percent in coming months? That’s my guess. To feel the real inflation, not just read the official numbers, you may want to go to a local supermarket in China to do your own research.

        The core cause of China’s high inflation is food but people are also very interested to see how much property prices can fall and how property prices can be better reflected in China’s CPI statistics. Premier Wen Jiabao does realise that curbing property prices is much harder than controlling food prices.

        In a rare state radio interview yesterday, Wen acknowledged that the measures Beijing took this year to cool the property market were “not very well implemented” and changed his tone on getting housing prices to return to “a reasonable level”. Previously, he was usually more straightforward in his statements about wanting to see prices under control during his final term, which ends in 2012.

        Besides inflation, it will also be interesting to see how Beijing deals with yuan appreciation. With higher bank deposit rates for yuan, a hopefully more bullish stock market in 2011 and prices of houses and villas rising across the vast nation regardless of policy curbs in 2010, do the factors sound perfect for seeing the yuan increase in value too? In fact, as many economists have already pointed out, a stronger yuan can also allow China to import commodities and other items more cheaply, helping the government get to grips with inflation.

        My grandmother, more than 80 years of age, once told me there were still many old people in China who miss the days when Chairman Mao was the leader and the distribution and balance of wealth were considered by some to be better shape than they are nowadays. China’s late paramount leader Deng Xiaoping wanted to “let some people get rich first”. Deng’s wish did came true, however, today we also see more and more ordinary Chinese people complain of feeling increasingly poor. What’s the answer for them?

        It was not easy for Chairman Mao to win the civil war for control of mainland China, and the new civil war on the economic front is going to be a real test of the intelligence and strength of the younger generation of Chinese Communists.

        George Chen is a Reuters editor and columnist based in Hong Kong.

        Photo: A 100 yuan banknote is placed next to a U.S. 100 dollar banknote in this picture illustration taken in Beijing September 24, 2010. REUTERS/Petar Kujundzic

        Inflation, the new civil war in China | Analysis & Opinion |
        “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

        Comment


        • #5
          Interesting...our government is trying to inflate our way out of debt while China is trying to lower inflation.
          "Only Nixon can go to China." -- Old Vulcan proverb.

          Comment


          • #6
            inflation is a typical problem for overheating economies...and the US econonomy is not in a state i would call overheated.

            Comment


            • #7
              Originally posted by gunnut View Post
              Interesting...our government is trying to inflate our way out of debt while China is trying to lower inflation.
              Your government succeeded in inflating China....

              Comment


              • #8
                Originally posted by Tarek Morgen View Post
                inflation is a typical problem for overheating economies...and the US econonomy is not in a state i would call overheated.
                Our printing press sure is running on overdrive right now
                "Only Nixon can go to China." -- Old Vulcan proverb.

                Comment


                • #9
                  Originally posted by cdude View Post
                  Your government succeeded in inflating China....
                  That has been our plan all along....muahahahahahahahaha....
                  "Only Nixon can go to China." -- Old Vulcan proverb.

                  Comment


                  • #10
                    Originally posted by gunnut View Post
                    That has been our plan all along....muahahahahahahahaha....
                    Not so loud! What happened to good opsec these days anyways?

                    Hopefully the yuan will appreciate some more.

                    Comment


                    • #11
                      Originally posted by Skywatcher View Post
                      Not so loud! What happened to good opsec these days anyways?

                      Hopefully the yuan will appreciate some more.
                      Oh yeah...sorry. I shouldn't have let the cat out of the bag. :smack:
                      "Only Nixon can go to China." -- Old Vulcan proverb.

                      Comment


                      • #12
                        the end is near...


                        Starbucks ups some prices in China

                        (AFP) – 8 hours ago

                        BEIJING — US coffee chain Starbucks said Friday it plans to increase the price of some drinks in China next year due to soaring commodity prices.

                        The price of Frappuccinos will be hiked by two yuan (30 cents) from Saturday, Shanghai-based Starbucks spokeswoman Caren Li told AFP. The current price for a small Frappuccino is around 30 yuan (4.50 dollars).

                        Starbucks, which has 400 stores in China, will however reduce the cost of other products such as vanilla lattes, as well as extra syrup, cream and coffee shots, Li said, without providing further details.

                        The price adjustments will "reflect increases in commodity prices and provide better value for our customers", she said.

                        Global raw material costs have skyrocketed in 2010 due to weather-related disasters and strong demand in emerging economies such as China.

                        Coffee prices have been trading around record highs after heavy rain destroyed coffee bean crops in Central and South America.

                        In November, US fast-food giant McDonald's raised the price of its hamburgers, fries and chicken nuggets by up to one yuan in response to spikes in meat, egg, and oil prices in China.

                        Beijing has been battling to rein in soaring food costs, which drove inflation in November to its highest level in more than two years.
                        “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                        Comment


                        • #13
                          China's Currency Reserves Rise to Record, Domestic Lending Exceeds Target
                          By Bloomberg News - Jan 11, 2011 12:38 AM PT
                          China's Currency Reserves Rise to Record, Domestic Lending Exceeds Target - Bloomberg


                          China’s foreign-exchange reserves climbed by a record last quarter and lending exceeded the government’s annual target, increasing pressure on the central bank to tighten policies to rein in liquidity and inflation.

                          The currency holdings, reported by the central bank on its website today, rose by $199 billion to $2.85 trillion, the biggest quarterly gain since Bloomberg data began in 1996. Full- year yuan-denominated lending of 7.95 trillion yuan ($1.2 trillion) compared with a target of 7.5 trillion yuan.

                          The central bank may need to raise benchmark interest rates, boost reserve requirements for lenders and allow faster yuan appreciation, economists from Standard Chartered Plc and Credit Agricole CIB said. Policy makers may also experiment with more ways of encouraging outflows of capital, after expanding a program for exporters to park revenue overseas and letting some citizens invest directly abroad.

                          “All eyes are going to be on what new policies the central bank can bring to the table,” said Jinny Yan, a Shanghai-based economist at Standard Chartered. “But there’s still going to be a lot of excess liquidity in the market in the first half of the year.”

                          Yan forecasts three interest-rate increases this year with the first this quarter. Citigroup Inc. said today that the central bank may announce rate and reserve-requirement increases before or during a Lunar New Year holiday starting Feb. 2, to take effect afterwards.

                          Yuan Strengthens

                          The level of China’s currency holdings is a world record.

                          The Shanghai Composite Index closed 0.4 percent higher, paring a decline in the past year of about 13 percent. The yuan strengthened amid speculation that the central bank will allow gains ahead of President Hu Jintao’s visit to the U.S. next week. The currency climbed 0.3 percent to 6.6204 per dollar, the biggest jump since Dec. 30, as of 3:40 p.m. in Shanghai.

                          Gains in China’s currency holdings underscore global economic imbalances and claims that the yuan is undervalued, topics President Barack Obama has put on the agenda for his Jan. 19 meeting with counterpart Hu in Washington. The yuan has climbed about 3 percent against the dollar since officials scrapped in June last year a peg which had been in place since the global financial crisis.

                          China will increase the currency’s flexibility this year to cut the trade surplus and reduce inflationary pressure, central bank Deputy Governor Yi Gang said in China Forex magazine.

                          Hot Money

                          Today’s data may indicate a “huge surge” in inflows of hot money, or speculative capital, according to Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole. He estimated the current-account surplus contributed about 40 percent of last quarter’s increase. China yesterday reported a $13.1 billion trade surplus for December, the smallest in eight months, according to customs data.

                          Economists’ median estimate was for a $112 billion gain in the reserves after a $194 billion increase between July and September. China’s holdings may reach $3 trillion by June 30, UBS AG estimates.

                          The currency regulator is seeking to curb inflows of cash from investors attracted by China’s growth and the prospects for higher rates and a stronger currency. Officials are also testing measures to encourage Chinese businesses and investors to have more money offshore.

                          Investment Channels

                          A program to allow exporters to park revenue in overseas accounts was expanded nationwide from Jan. 1. The government has also allowed citizens in the eastern city of Wenzhou to make direct investments overseas, according to a Jan. 7 local government statement.

                          M2, the broadest measure of money supply, rose 19.7 percent in December from a year earlier, the central bank said today, the fastest pace since May. Economists’ median estimate was for a 19 percent increase. New local-currency lending was a higher- than-estimated 480.7 billion yuan in December.

                          “Liquidity in the banking system will be more than abundant and the central bank needs to tighten more aggressively,” said Kowalczyk. He estimates reserve requirements will climb 150 basis points, with benchmark interest rates jumping 50 basis points, by the end of June.

                          For the biggest banks, ratios stand at 18.5 percent, excluding any temporary increases not publicly announced. The key one-year lending rate is 5.81 percent.

                          Bank Lending

                          Officials will use differentiated reserve ratios to improve liquidity management, Governor Zhou Xiaochuan said in an interview published by the central bank’s China Finance magazine on Jan. 4. The system involves setting separate requirements for lenders according to their balance sheets.

                          The amount of cash in the economy could surge this quarter because of maturing central bank bills and the tendency for bank lending to be highest in the early months.

                          The People’s Bank of China will have 1.2 trillion yuan of bills issued through open-market operations falling due in the first quarter and 869 billion yuan in the second quarter, Kowalczyk estimated. Standard Chartered’s Yan forecast new lending in January could amount to 1 trillion yuan while Goldman Sachs Group Inc. says the figure could be higher.

                          “This is going to be a challenge for the PBOC to keep control over lending,” said Helen Qiao, a Beijing-based economist with Goldman Sachs. “But the so-called dynamic differential reserve requirement will act as a threat to any bank that extends too much lending that they will be punished.”

                          China’s four biggest banks may need to limit the growth in overall yuan lending to about 14 percent this year to avoid being punished under this new system, three people with knowledge of the matter said today. Outstanding local-currency credit rose 19.9 percent last year.

                          Zhou raised banks’ reserve ratios six times last year and boosted interest rates twice in the fourth quarter. The government also cracked down on property speculation after record lending helped the economy recover from the global financial crisis.

                          --Zheng Lifei and Li Yanping. With assistance from Jay Wang, Sonja Cheung, Sophie Leung and Luo Jun. Editors: Nerys Avery, Paul Panckhurst

                          To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or [email protected]; Zheng Lifei in Beijing at +86-10-6649-7560 or [email protected]

                          To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at [email protected]
                          “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                          Comment


                          • #14
                            Folks are expecting another of rate increase.... looks like their are on the mark with this latest number.



                            http://www.nytimes.com/2011/02/15/bu...gewanted=print

                            February 14, 2011
                            Inflation Hits Nearly 5% in China, With Food Costs Soaring
                            By SHARON LaFRANIERE

                            BEIJING — Consumer prices in China rose 4.9 percent in January when compared with the same month a year earlier, the government reported Tuesday, as inflation remains a worry in the fast-growing major economy.

                            The rise in prices was less than expected, but economists said that could have been a result of a move by the statistics bureau to give diminished weight to food prices. Food previously accounted for a third of the basket of goods that made up the index. The shift made it impossible to directly compare the January data to earlier months.

                            Paul Cavey, head of China economics at Macquarie Securities, said the data showed that prices for goods other than food are rising sharply. Prices for nonfood items rose 2.6 percent in January over a year earlier, compared with a rise of 2.1 percent in December. “This shows a broadening of inflation away from just food,” Mr. Cavey said.

                            China has been fighting rising prices by raising interest rates and ordering banks to issue less credit. It has also allowed its currency, the renminbi, to appreciate against the dollar, albeit slowly.

                            The latest figures suggest that those measures have not been enough to control surging living costs, economists said. Prices rose 4.6 percent in December and 5.1 percent in November.

                            Xinhua, China’s official news agency, reported that the rising prices in January were partly a result of increased demand for food during the run-up to the Chinese New Year. Food costs rose 10.3 percent, the government reported.

                            Many economists predict that China’s inflation will not peak for two or three more months, forcing the government to take stronger measures that could slow economic growth. “Tighter credit conditions are beginning to have an impact on growth,” Mr. Cavey said.

                            According to a recent report by China’s National Development and Reform Commission, Beijing is prepared to further increase interest rates and raise the reserve requirement for banks to curb inflationary pressures.
                            “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                            Comment


                            • #15
                              Learning to like inflation
                              Higher inflation could help to rebalance China’s economy
                              Economics focus

                              Feb 17th 2011 | from PRINT EDITION

                              *
                              *
                              Economics focus: Learning to like inflation | The Economist

                              CHINA’S inflation rate has become one of the world’s most closely watched numbers. This week’s release showed that inflation rose to 4.9% in January, up from 1.5% a year earlier. The increase was smaller than expected, but has not quelled fears that as inflation creeps up the government will need to slam on the economic brakes. Some economists, however, believe that China should welcome higher inflation as a more effective way to rebalance its economy than a currency appreciation.

                              The recent surge in Chinese inflation has been driven mainly by food prices, but non-food inflation has also risen to 2.6%, its highest rate since the series began in 2001. Wages are increasing at a faster rate. For many years China’s large pool of surplus labour held average pay rises below the rate of productivity growth. But as fewer young people enter the workforce, wages are now rising faster than productivity. Arthur Kroeber of Dragonomics, a Beijing-based research firm, argues that if higher inflation reflects faster wage growth, this will help China, not hurt it.

                              Economists brought up to believe inflation is always a bad thing will choke on the idea of welcoming more of it, but the truth is that China’s average inflation rate of 2% over the past ten years has been unusually low for a developing country (see left-hand chart). The optimal inflation rate in an emerging economy is often higher than in the developed world because of something called the “Balassa-Samuelson effect”. As low-income countries catch up with richer ones, faster productivity growth in the tradable-goods sector pushes up wages. Since labour is mobile, this in turn leads to higher wages in the non-tradable sector, where productivity growth is slower, so prices rise faster than in rich countries. Moreover, some of the ways in which inflation is thought to be harmful to growth, such as discouraging saving and investment, hardly matter in China, where both look excessive.
                              Related topics

                              * Labour market
                              * Economies
                              * Chinese economy
                              * Asian economy
                              * Foreign exchange

                              Indeed, a bit more inflation could help to rebalance China’s lopsided economy. Its biggest imbalance is too little consumption, largely because wages have fallen as a share of national income. When wages rise more slowly than productivity, an economy produces more than it can consume, resulting in a current-account surplus. If wages now outpace productivity, workers’ share of the cake will rise, boosting consumption and helping to reduce China’s external surplus.

                              Wage-driven inflation would also help to narrow China’s trade surplus by pushing up the price of its exports. Conventional wisdom says that a stronger yuan would reduce China’s current-account surplus. Yet the empirical support for this is weak. In a paper published in 2009, Menzie Chinn of the University of Wisconsin and Shang-Jin Wei of Columbia University examined more than 170 countries over the period 1971-2005*, and found little evidence that countries with flexible exchange rates reduced their current-account imbalances more quickly than countries with more rigid regimes.

                              In adjusting current accounts, what matters is the real exchange rate (which takes account of relative inflation rates at home and abroad). Movements in nominal exchange rates often do not achieve the desired adjustment in real rates because they may be offset by changing domestic prices. For example, the yen’s trade-weighted value is around 150% stronger than it was in 1985. Yet Japan’s current-account surplus remains big because that appreciation has been largely offset by a fall in domestic Japanese wholesale prices, so exporters remain competitive.

                              An alternative way to lift a real exchange rate is through higher inflation than abroad. To an American buyer, a 5% increase in the yuan price of Chinese exports is the same as a 5% appreciation of the yuan against the dollar. Mr Kroeber argues that rebalancing the economy by running an inflation rate of 4-6% would be preferable to either a sharp increase in the yuan, which could cause big job losses in export firms, or a gradual appreciation which attracted large speculative capital inflows, as happened in 2005-08. Inflation is already playing the bigger role. The yuan has risen by only 4% against the dollar since early 2009, yet, according to calculations by The Economist, the yuan’s real exchange rate against the dollar (measured using unit labour costs in industry) has strengthened by 17% (see right-hand chart), because costs in China are rising much faster than in America.

                              The runaway risk

                              What about the risk that inflation could get out of control, as in Latin America in the 1980s and 1990s or in China itself in 1989, when an inflation rate of over 25% triggered unrest? Runaway inflation is usually the result of fiscal excess, financed by printing money, or rigid labour markets, which produce a wage-price spiral that the central bank fails to stop. Unlike Latin America in the past, China has a record of fiscal prudence and trade unions are docile. Its labour market is much more flexible than in the late 1980s, when most workers were in the state sector.

                              China is more like Japan and South Korea during their eras of rapid growth than any Latin American country. Over 15-year periods ending in Japan in 1972 and South Korea in 1996, GDP growth averaged around 9% a year and inflation averaged 5-6% without it accelerating out of control. China’s government cannot be complacent about rising prices. It should anchor expectations by setting an explicit inflation target. Interest rates on bank deposits need to be raised in line with inflation to encourage households to keep their money in the bank rather than speculate in property or shares. Otherwise negative real interest rates will inflate asset bubbles. That implies China still needs a more flexible exchange rate so it can lift interest rates while those in America remain low. But a bit more inflation would be welcome as well.



                              * “A Faith-based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?”, by Menzie Chinn and Shang-Jin Wei. www.ssc.wisc.edu/˜mchinn/chinn_wei_ca.pdf
                              “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                              Comment

                              Working...
                              X