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Monday, October 26, 2009

Inflation in China at 15%?

This tidbit, from a report on impressions of conditions in China, via a steel buyer who has been making the rounds in Asia (hat tip reader Michael) is more significant than it appears. High inflation levels in China (and the powers that be seem to get worried when it goes over 11%-12%) is consistent with the authorities having started to ease up on stimulus, particularly pushing banks to lend.

And high interest rates feed stock market speculation. Interest rates on deposits are low, so the routes for investors to preserve cash are stockpiling commodities (we’ve read various reports of both businesses and speculators going this route) and the stock market. But stocks often backfire as a store of value when too many people latch on to the same strategy.

I was at presentation a couple of years ago at the Asia Society on China, and one of the panelists observed that if you wanted to design a system guaranteed to produce hyperinflation, it would be hard to do a better job. The global financial crisis has provided a wee bit of a respite on that front for China; we’ll see, when world growth resumes, if this view proves correct.

From Steel Market Update:

Construction appears to be booming around Shanghai. A world expo will be held here in May 2010 and there is much construction ahead of the Expo. Funny thing is you see tons of cranes but very little actual work except on the government projects. A high speed train is being built between Shanghai and Beijing. Everything appears very prosperous and the traffic is almost as bad as India….Mill yesterday said that pricing within China has bottomed and is beginning to rebound. Judging by Shanghai this is believable but I don’t know how far this extends.

I have been told that times are really tough in Taiwan….

I have been to some rerollers and have not seen what I would consider excess inventory and the lines have been running. However, there seems to me that there is a similar feeling as the summer of 2008 – everyone feeling that the good times would last forever.

As usual the drivers are the best source of information. The average person in Shanghai area earns equivalent of $500 US per month. The average high rise apt (400 sq ft) is US $100K. So where does the average person live?

There has been a lot in local papers about the govt pulling back from stimulation because of concern about a too hot economy. I am told actual inflation is at 15%. The economy is not exporting.

Topics: China, Commodities, Economic fundamentals

Email This Post Email This Post Posted by Yves Smith at 7:23 pm

25 Comments » Links to this post

25 Comments:

  • Binhai Maven says:
    October 26, 2009 at 8:14 pm

    I was in China from 2006 to the spring of 2009. Lived through the market frenzy and shopped in actual shops when pork and cooking oil jumped by almost 50% in the span of a month. I can only say that the writer exaggerates with the anecdote about the system being geared to hyperinflation. True, the authorities don’t hesitate to turn on the monetary tap and they seem always willing to let the chips fall where they may. However, inflation produces popular discontent if in a different way than unemployment. So the system is geared to produce high-single digit to low-double digit inflation. When prices on staples rise sharply, there are scenes of hoarding and pandemonium in the shops. So far
    the Chinese stimulus hasn’t reached its limit because the rest of the world is still in recession. Commodity markets and foodstuffs, while flashing warning signals, are not at their 2008 levels and the population is optimistic. The Chinese markets have surged but they’re nowhere near as frothy as during the go-go year of 2007. It’s still too early to predict collapse.

    • Yves Smith says:
      October 26, 2009 at 8:26 pm

      The hyperinflation remark was nor mine, but from someone who was a banking expert, had been in China over a decade, and was considered credible enough to be featured at the Asia Society (which is a very blue chip connected organization). I flagged that it was his opinion, not mine, and said we would see if his theory was correct.

      Hyperinflation is defined loosely, but it generally is considered to be in effect when inflation starts influencing business decisions and practices, for instance, contracts with clauses that have escalators that kick off certain price indexes or wage rates. Although most people use it to designate Weimar type inflation, I’ve seen research that treats an inflation rate of 20% as hyperinflation, so 15% is not very far from that.

      Please distinguish more carefully between the view of “the writer” and others mentioned here.

      • IF says:
        October 26, 2009 at 10:00 pm

        So many people use the word “hyperinflation” these days that I feel a clarification of the annual rate is needed. Otherwise the term becomes meaningless. Your “20 percent p.a.” is only “strong inflation” to me. A repeated doubling of the price level every year might qualify. But a Serbian friend thinks 20-30 percent increase of prices a day is about the right level to define the term.

        Ultimately, it seems to me that successful “hyperinflation” should lead to destruction and complete re-issuance of currency. Other outcomes clearly show control of the central bank over the process.

        • Yves Smith says:
          October 26, 2009 at 10:29 pm

          It has been so long since America has had meaningful inflation that most people here don’t have much direct experience of how quickly behavior becomes distorted. When I went to college, a mere 7% inflation was enough to induce me to spend my summer earnings during ASAP on anything and everything I might need over the school year and could acquire in the fall because my money would be worth less if I waited.

          When I went to business school, capital expenditures in the US had collapsed because 1. companies and investors weren’t sure if anyone was making money (line items on an income statement and balance sheet inflate at different rates) and 2. the discount rates for long term investment were correctly high.

          So the distortions were significant then, they would be vastly more so at 20+%.

          • IF says:
            October 27, 2009 at 12:01 am

            I catch myself doing the same with reverse motivation: When I see goods at a significant sales discount I observe that my money earns zero in the checking account, which justifies buying multiple items. This way I can earn the discount or have nice presents for family/friends. But in any case, my hoarding appears deflationary to me (as it is only triggered by steep discounts), while you seem to argue yours was inflationary. But then again you omitt that you could have earned some interest during a 7 percent inflationary time. Or was this option for some reason not available to you?

          • Yves Smith says:
            October 27, 2009 at 12:24 am

            You are revealing your age. Mid 1970s, regulated deposit rates not at all in line with inflation. Interest bearing checking accounts (NOW, for negotiated order of withdrawal) with only limited checkwriting, BTW, permissible only as of 1980. Money market funds very new then, I first heard of them in 1979, even then I didn’t have enough to meet the very high minimum balances. Checkwriting on money market accounts then also very limited, and remember, checks took longer to clear then too.

      • mannfm11 says:
        October 26, 2009 at 11:49 pm

        There is some unusual stuff going on in China. When you reailze that the average Joe over there doesn’t make much, the effects of inflation probably fall on him, thus there isn’t much of a consumer system there. Second, they mark their currency to the dollar, which for all practical purposes means they convert at X yuan to the $. When they lend (inflate) at the rate they have this year, if it is going to speculate on raw materials and minerals from out of the country, then the dollar would actually be undervalued in relation to China money and thus the Chinese have devalued their own currency and by control of so many dollars, maybe the dollar as well. Without the front of the dollar, I could see this system hyperinflating, but being the huge flow of investment hot money into China, they are somewhat insulated.

  • Advocatus Diaboli says:
    October 26, 2009 at 9:50 pm

    Unless asians learn to consume like americans, their economies will always be at the whim of american consumers. But asians think that they are being smart by being frugal and mercantile. I wish them best of luck.. they are gonna need it.

    The chinese are also under the delusion that pumping money in a system, regardless of its end use (speculative BS), will ensure lasting prosperity. Let them find out the hard way.

    • mannfm11 says:
      October 26, 2009 at 11:51 pm

      Forget the savings nonsense, money coming into most Asian countries is confiscated by the government, oligarchy and crony capitalists. The average Joe that would consume like an American doesn’t have any money to consume.

  • Hugh says:
    October 26, 2009 at 9:50 pm

    It seems to me that China is as shaky their way as we are in ours. I wonder how the debt situation we have with China is going to play out. I can’t help but think a partial default is in our future. I also can’t help but think that at least a few Chinese economists and bankers must realize this.

  • Advocatus Diaboli says:
    October 26, 2009 at 9:58 pm

    Worldwide Jubilee OR Prolonged Worldwide Conflict/Uncertainty/ Misery.

    Make your choice.

  • ComparedToWhat? says:
    October 27, 2009 at 12:39 am

    Yves, is this what you meant to say?

    “And high interest [don't you mean inflation?] rates feed stock market speculation. Interest rates on deposits are low…”

    The US SSA implemented a COLA in 1973; CPI that year was 8.7 but here’s the previous five years (BLS).

    4.7
    6.2
    5.6
    3.3
    3.4

    I was just a kid but seem to remember unionized workers (younger readers might want to look up that historical artifact on wikipedia) negotiating COLAs around the same time or maybe a bit earlier.

  • bob says:
    October 27, 2009 at 12:48 am

    The party last year decided to outlaw inflation on the grounds that it was bad for press.

    From here on out it is to be called ‘growing consumer sector’

    Please adjust the headline.

  • biofuel says:
    October 27, 2009 at 1:11 am

    And why do we even discuss this – “hyperinflation” in China? Can someone clue me in as to what significance this has on my situation here in the US. Besides, by our definition it seems that they don’t have inflation, because labor earnings are not growing in Shanghai, as the source seems to imply by pointing to huge increases in housing costs relative low wages. So, the situation at worst seems to be reminiscent of US a few years back. So what…

    • ndk says:
      October 27, 2009 at 2:45 am

      We care deeply what the inflation rate is in China because that determines the amount of inflation or deflation we have in America, since their currency is pegged to ours. If we want to avoid deflation, we have to see significant inflation in China.

      I see asset price bubbles in China right now, steel included. But almost all their GDP growth is in investment today(Roach quoted 95% on BBTV tonight) and wages are growing at a tepid pace even by official measures. Both of these forces are ultimately deflationary and more powerful than asset price bubbles, and we should see the asset price bubbles collapse.

      I believe China is maintaining a deliberately deflationary policy and will not appreciate the RMB further. I also think they’re depressing the USD and RMB against other floating currencies by “diversifying” their trade surplus, which will further gear their economy towards exports.

      IMHO, China is not going to have serious domestic inflation any time soon because of the overhangs of labor and capacity and the PBOC’s demonstrated ability to sterilize intervention well. And that’s a policy decision that spurs investment in China’s economy to the detriment of the West.

      It incidentally gives their savings a fighting chance at surviving the Fed’s attempts at devaluation by imposing deflation on an America where people are becoming increasingly fiscally conservative.

      I think China is playing dirty economics and doing so brilliantly.

      • biofuel says:
        October 27, 2009 at 4:07 am

        Maybe inflation in China will lead to price increases in the US of all the stuff made there. But how would this lead to wage increases here? And without wage increases, import prices would eventually collapse…

      • Diego Méndez says:
        October 27, 2009 at 4:51 am

        It’s easy to create inflation in the US and Europe with no inflation/yuan revaluation in China: you just have to impose tariffs or similar measures (carbon-linked sales tax).

        Since China (like Japan in the 80s) would not import more Western consumer goods no matter how high its currency gets, the effect on global demand would be import substitution only in Europe and the US. This same effect can be reached via tarrifs or similar measures.

        So it’s the US and Europe who have the leverage in this crisis. I guess, after the next leg of the crisis appears, they will threaten China with tariff-like measures and the Chinese will feel compelled to revaluate the yuan.

        Let’s say we already have a global government, but a distributed one :-)

        • ndk says:
          October 27, 2009 at 10:07 am

          It’s easy to create inflation in the US and Europe with no inflation/yuan revaluation in China: you just have to impose tariffs or similar measures (carbon-linked sales tax).

          I agree with you that, from a theoretical standpoint, it’s about the only first step the U.S. can take to insulate itself from imported deflation from China. The impacts at the WTO or on other trading relationships as a result of such actions are much harder to judge.

          It strikes me as a more positive first step than monetization until China screams uncle and something snaps, but I’m well out of the halls of power for a reason. Several reasons, really. :D

  • MyLessThanPrimeBeef says:
    October 27, 2009 at 2:22 am

    We all know that the Chinese invented paper and flying money which was just paper money.

    What people forget is that the Chinese also invented toilet paper which Arab traders who were there in Hangzhou just before the Mongol invasion were recorded to say they thought it was not up to the hygienic stanards of Islam. They much preferred a bucket of water and a stick (with or without sponge, I am not sure). I guess it is understandable if you had to eat with your hand instead of using chopsticks.

    Of all people, the Chinese should know the dangers of issuing excessive flying money. They only have to read their own history books.

  • 30yearchinaman says:
    October 27, 2009 at 3:52 am

    This thread is interesting only as it shows that Americans continue to be woefully uninformed about China; continue to see China as a “red” threat and most importantly do not consider the benefits of cooperating and joining strategies together. Why must the US and China be at a priori economic odds with each other ? Western commentary about China is mostly written in glass houses these days.

    I lived in China when ration coupons were more important than cash. I still live in China where cash is now more important than most other things ! Just maybe the Chinese are creating a continental economy that will primarily trade with itself and continue to generate a better life for most of its citizens.

    Anyone ever consider that ?

  • FT.com | Money Supply | Economic news digest says:
    October 27, 2009 at 8:58 am

    [...] on the other hand, should worry about inflation. Anecdotal evidence suggests inflation is running at 15 per cent, and construction in Shanghai, at [...]

  • FT.com | Money Supply | Economics headlines says:
    October 27, 2009 at 9:19 am

    [...] China should worry about inflation: may be at 15% – naked capitalism [...]

  • Tuesday Morning « the news links says:
    October 27, 2009 at 10:05 am

    [...] Inflation in China at 15%? – naked capitalism [...]

  • plschwartz says:
    October 27, 2009 at 10:32 am

    Much of the conversation above assumes a duopoly US/China.
    But in fact the world has other significant economies.
    Right now they are getting whipsawed by Chinese “brilliant” economic manoeuvrings.
    I expect that there will start to be coordinated push-back against the yuan, as by setting a value for the yuan and tariffing to force it to that level.
    Chinese imports tend to be what they need. Chinese exports, strongly consumer based, tend to be what people want. It is thus relatively easy to play hardball with the Chinese. Obama playing “good cop” calls for someone to play bad cop.
    Perhaps Brazil?
    In brief one must use systemic thinking about the system of global economies Linear thinking about the US/China duopoly is just plain misleading.

  • mxq says:
    October 27, 2009 at 10:32 am

    30% m2 growth all year yet reported cpi is still negative?

    if you take just a modicum of cynicism that is applied to the western financial forumand apply it to those metrics, 15% inflation seems woefully understated

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