Although I have been here six years I am still sometimes surprised by the weird hypersensitivity shown by the Chinese towards anything that suggests foreign criticism. A number of research reports in the past year, for example, have argued that after years of exporting deflation, China may now be exporting inflation.This is really an economic matter that reflects rising prices in China, a rising local currency, and rapidly growing demand by Chinese businesses for commodities.Since inflation both in China and around the world seems to be rising, it probably should not be surprising that several of the world’s largest economies, including China, are likely to be contributing to this inflation. It may or may not be true, but its truth is an empirical matter and either way hardly represents “criticism” of China. Nonetheless many commentators in China are furious about the accusation and treat it as the equivalent of China’s being accused of human rights violations or imperialist tendencies.
Recently a magazine in the Republic of Korea published reports that China had become the primary source of price rises around the world, and a report by the central bank of Canada claimed that China's demand for petroleum and mineral resources would push prices up in the next few years. These set off an angry denial in today’s China Daily by a Chinese economist (“Price rise accusations have no foundation”) who says “These opinions are actually accusations that China is exporting inflation to other countries. This is not true and has been denied by the Chinese authorities time and time again.” He goes on the say “It is, therefore, especially important to analyze the validity of the accusations to see whether or not the rising prices of Chinese commodities in the domestic market have threatened the welfare of consumers in other countries.”
The article doesn’t make a lot of sense and consists largely of a bunch of unrelated statements, government projections and facts to conclude, in a style of argument one often sees here, that foreign accusations against China are unfounded.
As a matter of fact other countries should realize that the real reason for the intensifying inflation pressure is because of short-sighted trade protectionism. Trade protectionist campaigns of various countries keep low-priced Chinese commodities of reliable quality out of reach of their consumers, and raise their cost of living. As a reliable supplier of low-priced commodities to consumers around the world, China does not deserve any blame from other countries.
It is hard to imagine economists elsewhere in the world discussing the inflationary impact of their own economies on the world in such an aggrieved and defensive way.
According to a report in today’s China Daily, in the first ten months of this year China’s food imports, which I believe consist primarily of grains, were down 58.6% on volume and 39.4% in price. Assuming that the mix of food imports remained broadly unchanged, this implies that the unit price of Chinese food imports was up 46% when shipping costs, which have also risen sharply, are included. Obviously this has helped keep local food prices high.
Rising food prices in China are often blamed on domestic food shortages, but I understand that although severe droughts, especially in the south and southwest, have reduced expected yields, overall Chinese farms are producing at record levels – perhaps not surprising given that the country is still benefiting from the reversal of decades of agricultural mismanagement.I assume this means that with the growth of per capital income the food price pressure has been caused by a relative rise in demand rather than an absolute contraction in supply, and perhaps also by a change in the way food has been consumed – Chinese are eating more meat and relatively less grain than in the past, for example, which increases the demand for grain by increasing grain consumption by farm animals.
In addition total personal consumption has declined as a share of GDP, and this may have affected food consumption. Today’s Xinhua has this to say:
People's stronger desire to buy their own houses in China has curbed consumption of other commodities, said an expert with the Chinese Academy of Social Sciences (CASS). Although the government has taken measures to curb housing price hikes, residents in 70 large and middle-sized cities across the country still saw a price increase of 7 percent in 2007, said Li Peilin, director of the Sociology Institute under CASS.In some big cities such as Beijing and Shenzhen, he said, the housing price has risen by more than 10 percent.
Many people had to reduce their expenditure on other commodities to buy houses earlier than they originally planned. As a result, China's consumption rate has reached new low of 36 percent of the Gross Domestic Product (GDP) last year, compared with figures in the past 10 years.Li said the other factor which has brought major impact on people's life is the surging food price, especially the prices of pork, vegetable, edible oil and grain.
Still, I find it a little counterintuitive that food imports have declined.With reports that the authorities have released or are planning to release large amounts of food reserves to keep prices down for the upcoming spring festival celebrations, I suppose we might see a surge in food imports soon enough as the authorities replenish their grain reserves.
It is hard to keep track of where all the money creation in China is likely to show up, but yesterday four powerful departments (the Supreme People's Court, the Supreme People's Procurator, the Ministry of Public Security and the China Securities Regulatory Commission) jointly issued a new rule to strengthen the crackdown on illegal securities business
Companies apparently have been illegally selling unlisted or non-tradable shares to the public, promising that the company will receive a domestic or overseas listing soon enough, which will allow the buyers of the shares to sell out, presumably at a big profit.With all the illegal hot money coming in China, I would guess that a lot of this money is forced to find grey areas in which to invest, and this seems to be one of those areas.Needless to say it is hard to estimate the size of this market, but the fact that several government departments have decided to take action (or to be seen taking action) suggests that the practice is big enough to matter.
Yesterday also during a national televised conference, National Development and Reform Commission minister Ma Kai said China's fixed investment growth rate had been too high.He reiterated that curbing overheating is a top priority for the government, and argued that there were too many new projects, and that investment in energy-intensive and pollution sectors were still too high. He said that the investment spree was mainly the fault of provincial and local government leaders and warned that "All the trends can deteriorate our economic stability."
The central government is making a major push to try to limit the surge in investment that normally occurs when the new leadership takes up their positions – as they will in March of this year.It is hard to see how they will be successful. New leaders are definitely better off if they can hit the ground running and show that they are capable of commanding resources and distributing growth and employment.It will be a real challenge to keep them in check, especially as money in China is so plentiful.My basic assumption is that if there is a need to put money to work, and a desire to raise money for investment, it is likely to be extremely difficult to keep the two sides from meeting.
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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January, 2008
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