My Blog

March 18, 2008

In his press conference today for the conclusion of the annual session of the NPC, the country's top legislative body, Premier Wen smiled bravely at the attendees and television cameras and said that the government is fully confident that they can control inflation this year, although he admitted that it would not be an easy job.  According to the Xinhua report:

Wen acknowledged that it will be hard for China to attain its goal of holding the rise in consumer price index (CPI) at about 4.8 percent and controlling price hikes this year, which was made even more difficult by the worst sleet and snow disaster in decades in the first two months of this year.  “But we have no plan to change this goal,” he told reporters.

The premier explained that it shows the resolve of the government to control price rises and curb inflation by setting the goal, and it will help stabilize the people's expectations for price rises by doing so.

During that same speech Wen said “We are under mounting inflationary pressure. We also face the potential risk of drastic economic fluctuations.”  He announced no initiatives but said: “If we take the right measures, we are confident we can control inflation”.  He added: “We are sticking to the 4.8 percent target because it helps stabilize consumer expectations.  When prices soar, expectations can be more horrifying than the increases.”  

I am not sure what it means to say that inflationary expectations are more horrifying than inflation itself, but I suspect he means that rising expectations have a bigger impact on future inflation than current inflation does.  The trick, in that case, is to control expectations, and that means talking it down.

Of course I don’t agree.  In China’s case I think inflation is a consequence of monetary expansion, not “expectations”, but by saying this he more or less admits that the 4.8% inflation they have targeted for 2008 is not likely to be achieved.  He only made the announcement because he is trying to talk inflationary expectations down.  This strategy is not exactly costless, although I guess he didn’t have many options.  It undermines government credibility to insist on something that most people know is likely to be untrue and which will be almost impossible to achieve.  It reminds me a little of President Ford’s strategy for fighting inflation in the 1970s, which as far as I could tell consisted mainly of wearing a “Whip Inflation Now” button during all his television press conferences.

Premier Wen also said he was “deeply worried’ about the US and global economy and the fallout from the continuing weakness of the dollar.  He talked about using the full range of monetary policy options to address the inflation and overheating problems, which the market took as a signal that we would see a more aggressive stance on interest rates (the stock market was down nearly 4% today).  “No matter what monetary policies are adopted, we shall weigh their advantages and disadvantages and take both aspects into consideration,” he added. 

It sounds to me like he is saying that the financial authorities are willing to consider any policy option, and they acknowledge that at this point the option is not between good policies versus bad ones but between bad ones versus worse.  Actually I should amend this to mean almost any policy option.  According to the Financial Times he was asked a question abut employment versus inflation:

Asked whether he would sacrifice economic output to bring down inflation at the possible risk of increasing the jobless rate, Mr Wen indicated that growth and employment remained the overarching priorities. “We must ensure that our economy will grow at a proper rate in order to ensure employment,” he said.  “China is a developing country with 1.3bn people. We have to maintain a certain degree of fast economic growth to provide enough jobs.”

That is the nub of the policy dilemma.  One of the consequences of China’s expansionary monetary regime has been fairly rapid employment growth, but not enough growth to eliminate altogether the threat of rising unemployment.  The problem the government faces is in figuring out how to engineer a sharp slowdown in monetary growth without triggering job losses.  It is not going to be easy, but it probably mean that they will take serious steps to address monetary expansion only when the consequences (e.g. inflation) are so severe that they cannot be ignored.

Meanwhile the February wholesale price index was released today.  February wholesale prices were up 9.2% year on year and 1.1% month on month (which amounts to an annualized 14%).

Comments (9) for "We'll do anything to kill in...

Hallo 1. Wen: "..expectations can be more horrifying than the increases.” Maybe he thinks: because of inflation expectations, the people prefere better to buy today then tomorrow; so expectation push up prices more then necessary. off topic: 2. appreciation of RMB/stockprice/gov. holdings of stock: an idea/question a. CN has a big problem with money-inflows (that speculate on appreciation) b. assume, that CN wants to appreciate the RMB in one-move c. what I would do: - gov. puts its stocks in big volumes on the market --> stockprices goe down-->foreigners get cold feet and sell theire CN stocks and are then out of RMB --> gov. appreciates the RMB in one move --> the foreigners money, that speculates on appreciation is unhappy. d. question: could that stops inflows and reduces foreigners holdings of RMB? globumedes By globumedes - 3/17/2008 9:11 PM

Although I agree your points on inflation expectation and the talk, it appears that the March wholesale price index could decline month on month. Right now I looked at agricultural prices. They dropped by about 3.5% from the Feb level. I will follow the index closely and take a look at the supply data, especially on rice, pork and soybean. By fatbrick - 3/18/2008 12:57 AM

This comment is about your previous posting for which I was unable to post comments. This oil shortage is occuring. The same thing happened in the period leading up to and during the Party Congress in October. It's all over local Chinese media, although national media shy away from it. Refiners and gas stations aren't allowed to make money due to price controls and the rising price of oil internationally. Sinopec has been particularly rebellious. By orgulous - 3/18/2008 12:58 AM

This link (http://www.hsi.com.cn/hsicn/e_home/index.html) shows that the pure arbitrage "A share, H share" spread is now 74%, indicating that the same stock with the same voting rights is worth, on average, 74% more in China. This once again implies a price of 2.1k for the Shanghai exchange *purely based on no-arbitrage*. Real estate bubbles were created by artificially low interest rates in Japan in the 80's, and in China and the US now. The bubbles in the US and China, *when adjusted for leverage*, appear to be as large or larger than the bubble in Japan -- ours was smaller with more leverage, China's was larger with less leverage. The US bubble has popped, and we are spending as much as possible to cure it, like the Japanese did back in the early 90's. Given our bubble is as larger or larger, and our "balance sheet" was worse going into the bubble, we will have great difficult spending our way out. If history is a guide then, monetary authorities may become incapacitated at some point, leading to an extended period of economic stagnation. Highly deflationary for the dollar, making Chinese goods all the more expensive unless the Chinese spend even more to keep their currency down. The Chinese asset bubbles have yet to pop. This puts it at about a 1.5-2 year lag to the US. China's bubbles were created as a byproduct of keeping currency down, as it was in Japan. To me, the bubbles seem like shock absorbers, absorbing inflation that should be showing up in the price of their goods, but is instead showing up disproportionately in asset values. I was wondering what you thought about this, and what would happen if/when the Chinese asset bubbles burst, in the context of a US liquidity trap. By enkrateias - 3/18/2008 2:25 AM

"Wen: "..expectations can be more horrifying than the increases.” " Maybe he's just seen some forward looking inflation projections from the central bank. "One of the consequences of China’s expansionary monetary regime has been fairly rapid employment growth, but not enough growth to eliminate altogether the threat of rising unemployment. " Yep, but possibly there are some important structural mismatches between jobs on offer and the people who are applying to do them. I find it hard to see how there can be year on year wage increases in the 20 percent plus range if there are serious surplus labour pressures. What there may be are a lot of people over 40 (for example) underemployed, or something like that, there may also be too many people arriving in some urban areas looking for work for those areas to absorb, while in other areas - and especially some rural ones - severe shortages develop. Some of this then gets knocked on to the food prices issue. It would be very interesting to see an age breakdown of the unemployed. Overall I think China is moving towards its capacity limits on the labour side. What they need to do is move up the value chain in the kind of work they do (and thus get productivity gains) but that is easier said than done. "The problem the government faces is in figuring out how to engineer a sharp slowdown in monetary growth without triggering job losses." Well I think this is basically two problems, since first they have to work out how to engineer the sharp slowdown in monetary growth, and having gotten round that one they then need to think about the job losses issue. Basically the two obvious moves - raising interest rates and leeting the currency float - may accelerate monetary growth in the short term and produce even more sever overheating. Poland is currently stuck on this dynamic, since they have been raising interest rates sharply, and this has produced a strong upward movement in the zloty and a large increase in the rate of fund inflows, which of course accelerates and economy which was in need of cooling. So nothing here is easy, or as it should. As they say, we live in interesting times. By Edward Hugh - 3/18/2008 6:37 AM

Does anybody have a good picture on how PBoC:s sterilisation measures are going at the moment? I note for instance that they drained CNY 236 bln from the market on 13 March. But out of this only CNY 50 bln was for a longer period than three months. I have no clue on what is normal in these auctions, but I would assume that an indicator of too ample liquidity would be problems of raising long-term money at the fixed interest rate. (For three-year it seems they offer 4,56%) By Stefan, Tallinn - 3/18/2008 9:21 AM

Maintaining an undervalued currency is a self-fulfilling prophecy and the "real" price of the renminbi has been falling steadily. Maybe the reason they are not taking your advice and doing a one-off revaluation is because they do not want to have a depreciating currency. By holding the line, the real value slowly falls while the nominal value increases. Eventually it will be fairly valued. By 8 - 3/18/2008 10:00 PM

Hallo 8 My "advice" seems to be stupid: the gov wants to fight the slumping stock markets: "..Beijing has temporarily suspended the collection of corporate taxes from Chinese mutual funds in an attempt to boost the country’s slumping stock prices. .." http://www.ft.com/cms/s/0/5182e7bc-f5ef-11dc-8d3d-000077b07658.html globumedes By globumedes - 3/19/2008 2:02 PM

Fatbrick, I suspect that you are rigith and food prices will be down in March, mainly because they were artificially high in February. Part of this has to do with global food prices -- especially soya. I understand that some Chinese soya importers have already defaulted on their contracts with Argentine exporters because of a price decline. The thing to watch is whether price rises spread to other goods. Edward, I think many people implicitly assume that the Chinese labor market is one big, clearing market. It isn't. As you imply there are lots of very different markets that clear separately, and not just by age. It is just as possible (perhaps even more so, given greater rigidities) for some parts of the Chinese labor market to be in surplus and others in deficit as it is in Europe or the US. For example, there seems to be a shortage of educated, young village girls for Guangdong factories, which is pushing wages up, at the same time that there is a glut of university graduates, many of whom cannot find jobs. By Michael Pettis - 3/19/2008 3:08 PM