My Blog

August 12, 2008

CPI inflation numbers were released today by the National Bureau of Statistics.  As expected, they showed a continued decline in the year-on-year CPI inflation, although at 6.3% the figure was better than market expectations of 6.5%.  Given the trajectory of food prices so far this month CPI inflation for August could fall below 6%.  On average prices in July rose 0.1% month on month.

This is great news, but it is not unambiguously good.  The non-food component of CPI rose from 1.9% year on year in June to 2.1% in July, so although it is low, it is rising – not a good sign, in my opinion.  We are also hearing more and power about power shortages and rationing outside the Olympic-blessed city of Beijing.  World fuel prices may be declining, but they are still substantially higher than they are in China, thanks to price freezes.  This can’t help but put continued upward pressure on the cost of energy.

So now we’re caught in the bind that I discussed yesterday.  Declining CPI inflation will encourage those policy-makers who are mostly worried about slowing growth to insist that China back away from the various monetary and credit tightening measures it had tried to impose over the past nine months.  High and rising PPI inflation will strengthen the concerns of those who think China’s main risk is from excessive monetary expansion.

Nothing has really changed to shift the argument decisively in one direction or the other, and I suspect we will continue to see tentative policy moves in both directions.  The most amount of effort – or at least visible effort – seems to be that expended on tightening capital controls, but it is hard to know what this portends.  If the capital controls are very successful – and I am doubtful they will be – it might create breathing space and give the authorities reason to speed up RMB appreciation again, with the controls preventing an accompanying surge in speculative inflows.  If not, it puts greater pressure on them to regain control of monetary policy via a one-off maxi-revaluation.  Either way I still think China cannot resolve its current imbalances without a significant currency adjustment.

As for the stock market, at first it seemed pretty unambiguously in favor of the CPI data which, among other things, suggested that the authorities are more likely to be inclined to relax the “tightening” measures.  After a very bad opening that left the SSE Composite down by a little more than 1.5%,  the mid-morning release of CPI data turned the market around sharply, so that by lunch it had regained all it had lost, plus an extra 0.2%.

But the happiness didn’t last.  Perhaps there were rising worries that the huge gap between PPI and CPI inflations would hurt corporate profits, or perhaps investors are just to depressed to enjoy a rally (worrying, among other things, about unrest in Xinjiang province, where the death toll over the last week is up to 31), but immediately after lunch after a quick 7-point jump in the first five minutes the market suddenly lost its legs and began sliding.  It bounced around all afternoon, with the SSE Composite ending the day at 2457, just over half a percent below Monday’s close.

I think it is going to take a major effort to get this market to regain confidence, but even with a major government intervention I think there may be more bad news on the earnings front.  Today’s Emerging Markets Economics Daily (produced by the research guys at Credit Suisse) has this to say about car sales:

Total vehicle sales growth in China moderated sharply in July to 4% yoy.  According to the China Association of Automobile Manufacturers, sales of commercial vehicles contracted 3% yoy in July (to 177,600 units), the first contraction since January 2006.  Passenger vehicles sales managed to maintain 7% yoy growth (to 488,200 units), but this was the first single digit growth since August 2006.  The data reflect weakened domestic demand in China.   

Credit Suisse goes on the say that their equity analyst, Michele Mak, believes commercial vehicle sales will slow even more dramatically over the rest of they year.  

Three weeks ago on my blog I cited a Bloomberg article that said that “China's stockpile of unsold new vehicles rose about 50 percent in the six months ended June, hitting a four-year high, as automakers expanded production and sales growth slowed.”  In the article some commentators brushed off the rise in inventory saying that they were expecting a surge in car buying later in the year.  If it doesn’t happen, I suppose we will necessarily see rapidly rising car inventories.  Rising inventories is one of the main warning signals we have to watch for as evidence that the over-investment cycle is finally about to end.

Comments (13) for "CPI came in lower than expec...

A note relative to inventory. In a BCA Research note on Chinese economy I found this statement: "while some export-oriented small and medium firms are struggling with a margin squeeze,the overall corporate sector remains in good shape. There are no generalized financing difficulties or sharp deterioration in business conditions (Chart 4). Inventory buildup has been accelerating in recent months, but the inventory-to-sales ratio has continued to decline." The accompaigning chart was interesting reporting, for the general industries, both inventory % annual change e growth rate and the inventory-to-sales ratio since 1999: inventories are actually running at around 25% and are on a rising trend since 2006, but the ratio has been declining from above 11% (1999) to the actual (smoothed) 4.5%, even if the deceleration levelled-off recently. By martino dolfini - 8/11/2008 7:29 PM

Mr. Pettis, we keep hearing from you about how great it is to be able to listen to these wonderful new musicians in Beijing that you have at D22. I am just wondering if you might put this music on your blog? Why not? I am sure everyone would like to take a listen. Also, if any band is as good as you say, then I am sure that you will quickly find people who can provide funding, so that these wonderful bands which you think are so great, are heard by the whole world. Nothing to lose. Spears proved that! Let us hear what you have, please. By MrsDamocles - 8/13/2008 3:56 AM

With the BBC today reporting 128 micrograms per cubic metre in Beijing and the SSEC down around 2375 at 1:30PM, it was again beginning to look like another Olympic-Stock Market, Hendrix sort of day. AND I SAID FLY ON MY SWEET ANGEL FLY ON THROUGH THE purple haze But regarding the Olympics water situation, and diversion of water from poor, so-called “peon” farmers in Hebei to feed Beijing, as BOTH Hendrix and Elizabeth Economy, in her most recent published report, would say about Beijing's water table: “So down and down and down and down/And down and down we go” How will this influence the local stock market and overseas investment in Beijing, not to mention overall GDP? Now, and during the next five year plan? Hendrix, again: HURRY MY DARLIN' WE MUSTN'T BE LATE FOR THE SHOW Wonder if even Neptune could fix the Beijing city water problems now prognosticated by E. C. Economy, even given how heavy handed Neptune surely would be in his Herculean and faltering attempts. What is needed is another great leap forward to find a magic water machine. Or, other pie in the sky. “Yeah, sing on, brother!” Tell it like it is, through those rose colored glasses And we will continue to take your blog with a few grains of salt. By Messrs. Hott Moople - 8/13/2008 5:07 AM

Mr. Pettis, Are you experienced? Have you ever been experienced? Well, ......... I have. Just a small matter of speaking and reading fluently, Chinese. DO YOU? Were you there to bid goodbye to Zhou Enlai? Now, Mr. Pettis, lets all hear the great music you have been bragging about, for so long. My ears are a-tingling, in anticipation. Give it to us good. Put up or?.......Give me the same old Mozart/Clapton routine. By Lucky888888888888888888888888888888888888888888888 - 8/13/2008 10:32 AM

Try listening to DilesMavis' trumpet. Then, you will know. Or, if you are tone deaf, you can find some people to help you to find some real music. You will still not find it in Beijing. Not even at D22. If you really want to find some far out Chinese Guys playing up to the minute music, then you might try London or New York. For sure, no Chinese soul brothers are down south in Texas with those hillbillies. In case you do not know, Mr. Pettis, the majority of the best musicians, are studying classical music. And the are tops. Take a listen to Ma Youyou playing his cello. It still seems to be the case that you do not really know China. For example, pardon me, do you EVEN speak a smattering of Chinese? NO. YOU DO NOT. The other problem is that you are living in a very insular environment, in two cases. Number 1, you are a Foreign Teacher. This means that you automatically have much more respect than you deserve, not only from Confucian values, but also by just what most students are taught.from the very early levels, that one must respect a teacher, starting at grade one. Number 2. As far as I know, you have not made any effort to go out and live for an extended time with people outside the Beijing or Shanghai area. Therefore, you naturally no very little about the majority of China. Your Blog is very enjoyable. But, I think, you are pontificating on many subjects that, perhaps, could be better covered by a smart guy who truly knows China. Even a lessor mortal than you, such as John Kenneth Galbraith would be less certain about many things as you seem to be. And, also, Galbraith, I must say, if FAR more entertaining than you. By DilesMavis - 8/13/2008 11:22 AM

Regarding most of the original music in Beijing. Does anyone know if anyone in Beijing is doing an original Gregorian Chant? By WinsMr.Wally - 8/13/2008 11:57 AM

How do we get all these stupid Foreigners, such as Pettis, to arrive in China? Then we treat them like kings, bow down to them, and still they keep propounding things that we all know are not true? People like Pettis come in with their limited knowledge, and then think they deserve the ultimate respect. This is nonsense. These idiots, such as people like Pettis, continue to spout off about China. But, they do not even know Granola from Shanola. These idiots think they can spend a few years at Columbia, then come to Beijing, and be treated as royalty for the rest of their natural lives.. And they think that we need to bow down to them as if we were Mayans bowing down to the Pettis Sun God. I, for one, on this blog, will never bow down, or genuflect to this god of nebulous words. There is only one way to prove that Pettis is a sham. And I have already prepared a rear view mirror to do so. Now, I must continue to study all the words of Pettis. By GulagBaby - 8/13/2008 12:53 PM

Writing comments under several different names does not add your credibility, and you have written so many message over what I think looks like nine hours suggests you are obsessed with the professor. I wonder if as many people study your words and study his. Do not claim to speak for all Chinese -- you are a disgrace. He knows much more about China than you do. By XJ - 8/13/2008 4:46 PM

Dear mr. Pettis, What do you think about rapid growth of chinese infrastructure and especially railroads? I now China is trying to built a railroad even to Afganistan in absolutely impassable mountains. Is it a representation of chinese attempt to boost domestic spending in case of weakening demand from US and Europe? Thank you in advance, Alex from Moscow. By Alex Zotin - 8/13/2008 6:37 PM

I agree with the prof basher on one point: There is a limit as to how much a foreigner can know about China (less so in terms of breadth, but definitely in terms of depth) without Chinese language skills and without having lived in a non-tier-1 city. Having said that, I still sincerely believe that Prof. Pettis has accumulated an impressive amount of knowledge on China. As for genuflecting to "royal Westerners" treated like gods: At least as far as Chinese working for MNCs are concerned, I would rather argue that the Chinese WANT to have this kind of people as teachers as well as carries of a foreign mindset. Just look at companies that are overpopulated by Asian expats, who are essentially the most hated type of people from the locals' perspective. Chinese want white people to have a truly multinational environment. By You Dehua - 8/13/2008 7:06 PM

It is true that foreigners often can't get the depth that locals do, but it is also true that country specialists, locally born or foreign-born, often have a limited perspective that makes their own analyses very wrong. When Pettis said more than one year ago that the government would soon be debating to do a large revaluation, nearly every one, Chinese or foreign, thought he was wrong (including me) and that this would never be considered or taken seriously. Today, it is not only taken very seriously, but by now most Chinese scholars I speak with agree that it should have been done last year. Pettis' knowledge of hot money and currency pressures in other countries made him see something in China that the rest of us missed. But I do not know why we even discuss the silliy claims by this person who is obsessed with professor Pettis. Anyone who believes that "the majority of the best musicians, are studying classical music" has a government bureaucrat's idea of music not a music lover's. To think that the best a Chinese musician can do is to make a copy of 19th Century European music must be an insult to Chinese artists. By Francois L. - 8/13/2008 7:43 PM

MD, thanks. Inventory levels are going to be a key set of data. AZ, both fiscal spending and tax revenues have grown quickly (I want to say by around 30%, but I don't have the numbers in front of me). China has pretty decent infrastructure and is spending on more, but I do think that one of the things the government is prepared to do in case of a sharp slowdown is to boost fiscal spending. I don't know anything about the railroad to Afghanistan, but it will probably be a beautiful ride if finished. By Michael Pettis - 8/13/2008 8:29 PM

People write like Gutagbaby is the very reason today's Chinese people need to watch out for those trash. He uses some typical propaganda methods. That is his tactic. At first, throwing out some well known facts to establish his credit. Then, after people nodding along the way and possibly off the guard, he then reveal what he really want to say. We can see it very clearly in those writing. He first claimed that people who do not speak native language limit one's depth in understanding what is really going on in China. This is as plain as water. Then he attack Micheal's credibility. Such as, such as, do not speak Chinese language at all, did not live outside of big city, music may not be as good. After establishing himself in the high ground, then he started personal attack against Michael to discredit what he say in the world of finance. Typical profile for this guy is, white or oversea Asian decendent, male, 30s, possible military service background, some education, mostly likely in liberal art, English literature, natural people hater, could be a substance abuser. I will welcome that person to write more. So that people in China got a good opportunity to watch what kind of thing those people will do, and make a fool of himself. free education, good one, everyone like something free. However, most likely, this guy will f**ked off. Because he got nothing else to say, feel powerless, and wait in the shadow for another chance to attack China and/or Chinese friend, like Michael. At the same time, I and people like me are watching him. last word for Chinese people, when we open the door to invite friends in, those fly/masquito came in naturally. It is just a natural part of life. Those roaches has been with human being all alone the human history. It is important for us to recognize various kind of masquito to defend human being against them and a lot of those only live outside of Chinese boundary. however, nothing to be afraid of, because, at the very end, we believe that xie(2) bu(4) ya(1) zheng(4). It was true in China through out the history and it will be true for the whole world. we will watch him and see what he can come up with next. By China Merchant guy - 8/14/2008 11:50 PM