My Blog

February 11, 2008

Yesterday’s Financial Times says that US wheat inventories fell to a sixty year low and may even force the US to import wheat this year.  Apparently it had sold too much wheat last year and now will have to replenish stocks.  That news drove prices for certain varieties of wheat up nearly 11% last week and 50% so far this year.  There are also estimates that India, the world’s second largest wheat consumer, may have to import significantly more wheat than in the past, beginning in April this year.

One way of bringing wheat prices back down, according to analysts, is if higher prices in India and China cause farmers to allocate land away from cotton production to wheat production.  Price controls in China may make that process very difficult.  I am no grain expert, but the recent trend of shortages and rising grain prices is becoming monotonous and bodes poorly for China’s fight against inflation in 2008.  With food prices rising so quickly, even an annual RMB appreciation of 9-10% will not bring the price of foreign food imports down in local currency terms.

Next week we will get January’s CPI and PPI inflation numbers.  I doubt they will be good, but I suspect that inflation doves will insist that the distortions caused by the winter weather crisis make them useless in determining policy changes.  Next month’s CPI numbers are also likely to be distorted, by the spring festival.  That means it won’t be until mid-April, when we get the March numbers, that we might have sufficient evidence of persisting inflation to affect policy choices.  Of course that is the time the new provincial and municipal leadership comes into power, and so there may not be a lot of appetite for economic tightening anyway.

Separately Peter Mandelson, the EU’s trade commissioner, made some fairly aggressive claims last week in a speech at Cambridge University about rising European protectionist ire aimed at China.  Mandelson has the reputation of being a hard-core free trader, but his comments suggest that he is finding it increasingly difficult politically to explain away Chinese trade policies to his European constituents.  The whole shifting of Chinese trade surpluses from the US to Europe never had much chance, in my opinion, of being sustainable.  Thanks to its more flexible economy and financial markets, and perhaps a different attitude towards globalization, the US is able to accept and absorb these kinds off imbalances much more easily than Europe.  This means, I think, that unless the dollar rises strongly against the euro, it will be difficult for China to slow the rate of appreciation of the RMB without causing rising anger in Europe and maybe even trade-related moves.  China might want to do so should it suddenly become worried about a rapid drop in exports to the US caused by a slowing US economy.

Rising global inflation, the potential US slowdown, its impact on the rest of the world, and the accompanying credit crunch are seriously complicating China’s policy options.  A few years ago when former Brazilian central bank governor Arminio Fraga visited Beijing, one of the points he tried to make to government officials with whom he met, he told me, was that the best time to make difficult adjustments to the currency regime was when local and external conditions were great, as they were at the time, otherwise the financial authorities might find themselves in the position of being forced to make adjustments when conditions were much more difficult.  It seems like an obvious point, but bears repeating often.