We are just finishing with the May holidays and next week we will return to the busy schedule of the past few weeks.I think much of the focus for the next few days will be on the stock market.I know that I’ve been invited to speak Thursday on CCTV’s Dialogue, a current events show, on the subject of the stock market and what the government ought to be doing about the recent market volatility.This is clearly an issue that has drawn an awful lot of attention and debate recently.Regular readers of my blog know that although I sympathize with the government’s political concerns about recent stock market volatility, the fact is that each one of their interventions undermines the capital allocation process, and by strengthening the speculative nature of the market, actually increases volatility in the medium term.This is the point I will try to make on Dialogue.
I don’t know if it comes out at the end of this week or the beginning of next, but probably what many of us are most curious to see is the April CPI inflation number.The initial noise in the market is relatively positive. Bloomberg has a short article today, for example, that suggest that at least some analysts believe it will come in above January’s 7.1% but well below February’s 8.7% or March’s 8.3%:
China's consumer prices likely rose 8.1 percent in April, slowing from a month earlier, after prices of some agricultural products fell, the China Business Journal reported, citing unidentified people. Inflation is mainly driven by food prices, and as long as it remains stable, China shouldn't take steps to suppress economic growth, Liu Yuanchun, a professor at Renmin University of China, said in the Chinese-language report.
Likewise today’s China Daily also has a pretty optimistic report.
The slowing growth of China's main inflation indicator is set to continue in the April figures, thanks to falling farm produce prices, market analysts said on Sunday.
The consumer price index (CPI), which hit 8.7 percent for February and 8.3 percent for March, would probably be around 8 percent for April over the same month last year, said Chen Jijun, an analyst with CITIC Securities. Falling farm produce prices were the main factor dragging down the rise in the CPI, said Chen.
CPI inflation of 8.0-8.1% would bring month on month CPI inflation to negative 0.3-0.4%.It would mean that year to date we are running at an annualized inflation rate of 8.3% – well below the 12.9% at the end of March.
This would be great news if it were true and would certainly give the authorities a sense that they had gained some respite, and they certainly would have, but of course we need to be careful about how we interpret the data.The first and most obvious point is that any sustained upward inflation cycle is never in a straight line.For example the US experience in the 1970s did not consist of an unbroken series of rising monthly inflation numbers but rather consisted of an inexorably rising trend with many monthly and even quarterly periods in which CPI inflation actually declined substantially, before rearing again.
More importantly, we would need to look at the breakdown in the numbers.Given the extremely high jump in food prices earlier this year, it could very well be we are experiencing a necessary and temporary sharp drop in food prices within an overall rising trend.We won’t know for sure from looking just at food prices, but the non-food component will tell us a lot.If non-food inflation is stable or declining while food prices decline sharply, April’s CPI report would be an unmitigated blessing (or would be if it continued for at least one or two months more).
If non-food prices keep rising, however, the numbers are far more ambiguous.One explanation would simply be that the very sharp, temporary jump caused by exceptional January and February conditions was partially reversing itself, but underlying inflation continued unabated and was spreading into other goods and services.
I suspect I am falling into the trap of reading way too much into individual data points, but with so little information coming out recently, it is hard to resist the temptation.
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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reported, citing unidentified people. 
September, 2007