As expected, the National Bureau of Statistics of China released a new set of economic numbers today. According to the release, CPI inflation year on year for June was 7.1%, its lowest level since January. It was 7.7% in May, 8.5% in April and 8.3% in March. On a month-on-month basis CPI declined by a little under 0.2% (following a 0.4% decline last month). This is more or less in line with expectations. The information is presented a little differently than it has been in the past, and I cannot back out the food and non-food components. I am hoping some cleverer analyst will be able to do so, but so far I haven’t seen anyone else provide a breakdown.
PPI numbers, also as expected, were much worse. PPI prices rose 8.8% year on year in June, compared to 8.2% in May, 8.1% in April, and 8.0% in March. I have already pointed out many times before that as the CPI numbers become increasingly tainted by price controls, more and more of us are looking at PPI to get a sense of underlying inflationary pressures. I think any sense of relief prompted by the continued decline in CPI inflation will be held in check by the frankly very poor PPI numbers.
On a related topic today’s Financial Times has an interesting article by Jamil Anderlini and Geoff Dyer with the rather worrying title "China on the brink of electricity shortfall."
China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses. Nearly half of China’s provinces have started to ration electricity as the country enters the peak summer season, facing what analysts describe as its worst coal shortage.
Analysts warn that this year’s electricity shortfall could be more severe than in 2004, when the country was affected by its worst power shortage in decades because of soaring demand for power as the economy boomed.
This is part of the problem with the inflation numbers. We are exchanging higher prices for shortages, and although one is as much an indication of inflationary pressure as the other, only the former shows up in the CPI and PPI numbers. These kinds of shortages (and there are many more) are masking very real inflationary pressures, but earlier experience, such as those of the US in the 1970s, suggest that shortages are only a temporary way to mask inflation. I expect price increases will have to occur soon.
In general I don’t think the numbers today are going to help the economic policy-makers reach any kind of firm conclusion one way or the other. GDP growth has slowed, according to today’s release, but a slowing to 10.1% growth in the second quarter (from 10.6% in the first), although slightly lower than expectations (and the lowest in three years), shouldn’t be enough to strike terror just yet., especially since, worryingly enough, fixed asset investment surged, by 26.8%, compared to 25.6% in the first five months of the year. This suggests that if the economy is moderating, it is not because of a decline in the overinvestment problem.
None of us really expected this batch of numbers to do much to clarify policy-making, and that is more or less what happened. That won’t stop the lobbying, of course. The Ministry of Commerce and its allies are stepping up the pressure to limit RMB appreciation, even though it is very hard to conclude from the numbers that Chinese exports are suffering because of currency appreciation. In fact export growth is remarkably strong given the slowdown in global demand and the high price of commodities.
I suspect the debate about whether or not to further "tighten" monetary conditions will also rage on. In his article on the data release Dong Zhixi in today's China Daily put it this way:
These concerns may be part of the reasons why the finance committee of the National People’s Congress, China's parliament, pledged on Wednesday to maintain its tight monetary policy for the rest of the year. However, watchers sensed a softening of words in its description of the fight against inflation. The committee said curbing price pressures would be a "prominent task" in the months ahead, instead of "top priority," phrasing that economic leaders repeated in the early months of 2008.
Analysts believe policy makers are trying to find a balance between inflation and economy growth and are gradually shifting towards preventing a major economic slowdown.
China’s banking regulator told policy makers that forcing banks to increase reserves has hurt the industry's ability to repay debt, according to a person with knowledge of the matter. The People's Bank of China raised its reserve ratio requirement to a record 17.5 percent last month to rein in loan growth and inflation. The China Banking Regulatory Commission has warned against ordering further increases, the person said, declining to be identified as he isn't authorized to speak publicly on the matter.
China's push to remove funds from the banking system resulted in the slowest loan growth in more than two years last month. The risk is that more banks will fall below the minimum requirement for short-term financial strength, the person said.
Amid all the economic data, the stock markets continue to be depressed. The SSE Composite drifted more or less steadily downward today, to close at 2685, down 0.78% for the day. So far I haven’t heard too much angry noise coming from investors, perhaps because last week was pretty good (up nearly 8%), but I did read with some dread a report on today’s Bloomberg that says “Pakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.”
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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December, 2007