The PBoC released February PMI numbers. Growth is still high (PMI at 53.5, up from 53.0 in January) but has stabilized below its earlier higher numbers in the 55 range. Input prices were very high, suggesting that price pressures are very strong.This doesn’t bode well for inflation this month or next.
Yi Xianrong, of the Institue of Finance and Banking, part of the Chinese Academy of Social Sciences, had an Op-Ed in today’s China Daily whose title, “Tight monetary policy must not be relaxed”, pretty much says it all. In the article he points out that:
The recent snowstorms that hit the southern regions of China raised fears in and out of the country about its impact on the economy.The popular opinion was that China should reconsider its monetary policy, which was tightened late last year. Admittedly, China will feel the shocks of a global economic slow down because it is a big player in international trade and an active participant in globalization.
However, these shocks will not be significant enough for the decision-makers to change the current monetary policy. After all, an imbalance in the economic structure is a more important consideration.
He concludes by arguing that “decision-makers must realize that the price rise issue is a serious and complicated one. Substantial measures must be taken to contain further price rises. More importantly, the tight monetary policy should be continued and not relaxed.”
None of this is particularly new, but by my account articles in the official media warning that this is no time to relax far outnumber articles asking for an easing of policy.The NPC starts tomorrow and I guess the great consensus machine is in high gear.
One funny note: Xing Pu, a Shanghai CPPCC delegate, put forward a proposal a few days ago that one good way for the government address the yawning income gap is for the authorities to give every citizen a “red envelope” bonus of 1,000 yuan (about $140, which for 1.3 billion people would release $180 billion into the economy). He even suggested that the rich might be encouraged to donate their red envelopes to the poor (yeah right!).This would shift income into the hands of those who need it most. Most official commentators seem to have dismissed the idea pretty quickly, but the idea has proved immensely popular and has caught the imagination of the Chinese blogosphere.There is no way that the government can do this – it would be a great way to ensure inflation takes off – but they might try to figure some way of responding.
As a complete aside the Financial Times has an interesting article about the “tsunami” of money that will be amassed by oil exporters with oil prices so high. In my model it has been the recycling of the US (and, a lot later, the European) trade surplus that has underpinned this version of the globalization cycle. For all the fear of a US slowdown I don’t think we are yet at the end of this cycle, although the last stage may be a little different. Emerging markets are likely to benefit from the investing needs of the various kinds of sovereign wealth funds with their burgeoning coffers.Remember that the last time we saw developed-country stagflation and massive petrodollar recycling was in the mid- and late-1970s, when the recycling machine fueled what was then called the “LDC” syndicated loan market. The capital flows “game” is entering a new phase, but it ain’t over yet, and a lot of risk assets, perhaps especially in Asia, are going to do very well.
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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