Archive for December 6th, 2010

Monday, December 6, 2010

Monetary Policy 2011: “Relatively Tight”

A word of warning: JR tries to explain the economy to himself. If it helps you, too, so much the better. Corrections are welcome.

China was

likely to raise interest rates and allow appreciation of the yuan based on the currency’s effective exchange rate under the country’s new “prudent” monetary policy,

the Wall Street Journal (WSJ) quoted Ba Shusong, a deputy director-general of the Financial Research Institute under the State Council’s Development Research Center, on Sunday.

Ba also predicted China’s consumer price index will rise a median 4%-5% in 2011, according to [People’s Daily, quoted from by the WSJ] report.

Also last weekend, from Friday through Sunday, researchers met at Sun Yat-Sen University. China’s major universities take turns in holding the Chinese Finance Annual Meeting (中国金融学年会).  According to the Guangzhou Daily (广州日报), republished by Enorth (Tianjin), their focus was on excess liquidity (流动性过剩) and on hot money (热钱) on overseas and domestic markets. The central government’s emphasis was on prudent monetary policies (稳健货币政策) for 2011, but the excess liquidity caused by currency liquidity (货币增发) was to continue, the conference concluded. Underlying inflation1) was far higher than the official numbers. The influence of domestic hot money on inflation also outweighed the influence of international hot money by far. The state was to face more severe tests in its macro-economic controls. The amount of money in the economy [apparently referring to base money plus demand deposits, M1] would continue to increase at more than 20 per cent, i. e. with newly-added credits amounting to 7.5 trillion Yuan RMB.
Wang Xi (王曦) Sun Yat-Sen University Lingnan College‘s director, believed that official statistics underestimated inflation. It could be conjectured from the M1 money quantity increase that compounded underlying inflation could reach more than 30 per cent.

Wang Xi believes that the nearly ten-trillion yuan RMB newly-added credit amounts of 2009 plus this years loans’ growth are responsible for the immanent rebound of excess liquidity.

Agricultural Products at Revolutionary Prices

Chinese Currency: Agricultural Products at Revolutionary Prices

The Guangzhou Daily / Enorth article quotes more researchers and goes beyond the topic of excess liquidity – but I suggest that someone else takes care of translating the remaining paragraphs. It may be worth mentioning that the conference addressed the issue of income distribution (收入分配), too. The conference called for a long-term policy, beyond the Sixteen Measures (国16条) currently applied. The Sixteen Measures, published by the State Council on November 20, include strong efforts to develop agricultural production, stable supply of agricultural and sideline agricultural products [sideline probably refers to special fruits and agricultural products for medical use], reducing production costs, safeguarding the supply of fertilizers and of energy, and subsidies (大力发展农业生产、稳定农副产品供应、降低农副产品流通成本、保障化肥生产供应、做好煤电油气运协调工作、发放价格临时补贴等).



1) Underlying inflation would be different from headline inflation, in that headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy. As a result, headline inflation may not present an accurate picture of the current state of the economyWikipedia as of Dec 6. Underlying inflation may,possibly  in a not-too-scientific way, be equated with core inflation. The Financial Times Encyclopedia definition seems to allow this equation: underlying inflation would be the general rise or fall in prices, not including prices that are untypical.
It’s JR’s belief that 潜在通货膨胀 should be translated as underlying inflation, not as, for example, latent inflation – which (according to this paper by Juán Carlos Bencomo et al, page 92, first paragraph) would be a different measurement. If you steal from JR’s blog for your scientific homework, you are doing it at your own risk.
According to Australia’s Parliamentary Library, the underlying rate of inflation is an alternative to the consumer-price index (CPI) in that underlying inflation excludes quite a number of household necessities – see table 1 there.
If they are excluded from Chinese underlying-inflation computations, too (and given that food prices would account for more than one third of China’s CPI according to The Economist Nov 20 2010 page 57), I’m wondering which prices are the strong inflation drivers considered by the Finance Annual Meeting.



Garlic Prices: to Buy is to Believe, May 14, 2010
2009 first half: 7.37 trillion Yuan newly-added credit, BJ Review, Aug 6, 2009

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