One of my former students who now trades for an international investment bank has told me that apparently the PBoC has asked several banks to hold reserves in the form of US dollars.The PBoC will hedge their losses on RMB appreciation. He claims they did it for two reasons: First, to curb onshore US dollar loan growth, and second to reduce the amount US dollar intervention.
Xinxin Li, of the G7 Group, recently wrote in a report that he thinks that, after the 17th Plenum, the PBoC's position in the Cabinet has been weakened.By contrast, he argues, many local party bosses who favor rapid economic growth have been promoted to top positions. As a result he expects the PBoC to have less independence and influence in the Cabinet. I think the PBoC has the clearest understanding of how difficult China’s monetary position is, and so I would hope to see them get more, not less, influence on policy-making.
Among other things Li argues that this reduced presence will force the PBoC to be more data-dependent in their policy recommendations. With a lot of the major Q3 and September data seeming to suggest that the pace of growth is moderating, it has given ammunition to support the view of government agencies that don't like continuous tightening. In other words, the PBoC will need stronger data to make a case within the government for its rate hike.
As I argued in an October 26 entry, I am much less impressed by the supposed improvement in the numbers.Many of the figures released in October were only slightly better than their excessively high previous levels, and so even movement in the right direction, while better than the alternative, is not enough.What is worse, one of the key numbers, growth in industrial production, didn’t slow at all.It actually soared.For me growth in industrial production is one of the most important data points in trying to get grips on China’s monetary conditions because of its impact on the country’s trade surplus.
Even the slight improvement in CPI inflation may not be all that it seems.Keith Bradsher writes in last week’s New York Times that “China has also controlled the overall rise in consumer prices partly by freezing on September 19 all government-set prices, notably for gasoline, water, electricity and natural gas, until at least the end of this year. The government's National Development and Reform Commission also banned any increases in the maximum allowed prices for medicines, air and rail trips and certain agricultural commodities like wheat, rice and cotton.”
Certain regions in China are experiencing shortages in diesel fuel.I heard first from my students and then in the press that in parts of coastal China gas stations are rationing the amount of diesel they sell.This often happens when price controls clash with underlying inflation – instead of showing up in higher prices, inflation shows up as shortages.
I believe that the last time gasoline prices were set by the authorities, oil was trading around $60 a barrel.Unless oil prices drop substantially in the near term I would expect that there might be pressure on the government to let gasoline prices rise, thereby showing up in the non-food component of CPI inflation.Perhaps more worrying, to see inflation spread from food to transportation may lead to a rise in inflationary expectations.All eyes will be on October inflation numbers, which I believe should be released in less than two weeks.
On October 29 in Vox, an online journal (http://www.voxeu.org/index.php?q=node/675), Shang-Jin Wei, a finance professor at Columbia University’s Graduate School of Business, had an interesting short piece on China’s exchange rate regime.Based on research for a paper he wrote with Menzie Chinn (which I wasn’t able to read), he argues that the benefits of China’s moving to a flexible exchange rate may be exaggerated as far its impact on adjusting global current accounts and China’s domestic macroeconomic balance.He says:
…If one could engineer a real appreciation of the renminbi, it could have some effect on China’s trade or current account balance. Indeed, in a separate research project that I am doing with Caroline Freund and Chang Hong, using China’s bilateral trade data and separating processing from non-processing trade, we find evidence that bilateral trade volume clearly responds to changes in bilateral real exchange rate, especially for non-processing trade.But a more flexible exchange rate does not promise a faster current account adjustment or resolution of global current account imbalances.
If there is to be an adjustment of the currency, and Wei seems to think that on the whole it would benefit China, his conclusion is that a shift to a de facto dollar peg would not slow down the adjustment process (in fact he says “if anything, there is slight, but not very robust evidence that less flexible nominal exchange-rate regimes sometimes exhibit faster real exchange-rate adjustment”) and furthermore, to the extent that the de facto dollar peg constrains the conduct of China’s monetary policy, he argues that it might be a good thing.
Wei is a lot more optimistic than I am about how much room the PBoC currently has for further maneuvering, but I do agree with another of his points, that reserve accumulation can be a very volatile process.He says:“The very high speed of China’s foreign reserve accumulation really took off within the last four years...It may very well be responding to a shift in market expectation on the RMB movement, or at least the reserve accumulation and the exchange rate speculation feed on each other.However, if it took only four years for China’s FX reserve to triple in value, it may take only another four years for it to lose 60% of the value once the exchange rate expectation starts to reverse itself.Economic history books are full of examples of seemingly sudden shifts in market sentiment.”
A few hours after one of my friends in the US posted my last entry on “Hidden inflation” (because of the firewall I cannot post entries in China and must have a friend abroad do it for me), I read a Reuters article with the alarming title “Fuel crisis spreads to the capital”.According to the article:
The mainland’s worst fuel crisis in two years spread to the capital and other inland areas by Wednesday, even as its top refiner pledged to guarantee supplies to a market crippled by the gap between state-set pump prices and record crude oil markets…
…Rationing had already spread along the southeastern coast from the manufacturing hub of Guangdong through Fujian, Jiangsu and Zhejiang, Reuters reported last week. But inland Hunan, Henan and Hubei provinces, were also struggling, domestic media reported.
Perhaps this is scant comfort, but today oil did trade down on the New York Mercantile Exchange to $89.75 per barrel, from Monday’s record high of $93.80.
This may not be terrible relevant to the topics I normally cover in my blog, but French Foreign Minister Kouchner is in town today to prepare for the visit later in November of President Sarkozy.I assume that since Sarkozy has made it clear in Europe that he thinks monetary and currency questions are within his purview, an important topic of conversation when he is here will be the RMB.The value of the RMB has dropped sharply against the euro, one of which consequences is that China’s trade surplus with Europe has recently soared, much to Europe’s dismay.There is an increasing amount of unhappiness there about trade relations with China, and two nights ago I had dinner with a very knowledgeable reporter from Italy who said that in Italy anti-China feelings have become very strong.
Although I believe that Kouchner will have a brief meeting with Premier Wen Jiaobao, who is reportedly one of the key figures on the currency issue, nonetheless I don’t expect Kouchner is here to discuss the RMB.That is not really his area of expertise.From what I gather the talks are likely to be dominated by human-rights-related issues – Myanmar, the Dalai Lama, press freedom in China.This is not going to be an easy discussion and, apparently, President Sarkozy is also expected to discuss human rights issues “frankly” in his meetings here.
I wonder how much of this is bargaining and how much genuine.If France begins to take a tough line on political issues, is that to make it easier to back off in exchange for flexibility on the subject of the RMB, or is France serious and will that only make China more reluctant to give ground on the issue of the currency?
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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), Shang-Jin Wei, a finance professor at Columbia University’s Graduate School of Business, had an interesting short piece on China’s exchange rate regime.
January, 2008