Inflation: The Emperor’s new Thermometer

News too good to be true – that’s the reaction of several analysts quoted by the Wall Street Journal (WSJ) on Tuesday.

China’s consumer price index rose 4.9 per cent in January from a year earlier, according to China’s National Bureau of Statistics (NBS), wrote the WSJ.

… at a time of politically-sensitive food price gains, it was unlikely that a reformulated CPI basket would produce a higher inflation figure,

the WSJ quotes Alistair Thornton, of IHS Global Insight.

The new inflation number is the first after the NBS adjusted the weighting in the basket of goods it uses to calculate consumer prices, explains the WSJ. That’s one reason why the January numbers had been awaited somewhat eagerly.

Johnny Erling, German daily Die Welt correspondent in China, goes into some detail:

Food prices in particular are to blame for the high inflation rate. They rose by 10.3 per cent in January – vegetables by 14.4 per cent, grain by 15.1 per cent, eggs by 20.2 per cent, and fruits by 34.8 per cent. Manufacturers’ prices rose by 6.6 per cent. The National Bureau of Statistics itself triggered doubts – on its website, the authority concedes that its January figures had been calculated on a new basis. Composition had been weighed differently, too. Housing-weighting had been increased by 4.2 per cent more, but food prices by 2.2 per cent less. Bloggers write that Beijing “fought inflation in a Chinese way. The state has tinkered itself a new thermometer”.

"To the People, Food is Heaven" (民以食为天)

"To the People, Food is Heaven" (民以食为天, archive)

Three weeks ahead of the National People’s Congress convening in Beijing, the 4.9 per cent index is sufficiently convenient for China’s planners, believes Erling. Inflation would be a topic, but without discussion as heated as if it had been 5. something.

Also, the stock markets had been within an ace of signalling a thumbs-down, which didn’t happen after the National Bureau of Statistics had published an index less than five per cent.

Not only bloggers seem to doubt the NBS’ – or the central government’s – scientific accuracy in calculating inflation. Early in December last year, Chinese economists gathered at Beijing’s Sun Yat-sen University and reportedly found that underlying inflation was far higher than the official numbers. Much of their discussions, according to Guangzhou Daily, focused on excess liquidity (流动性过剩) and on hot money (热钱) on overseas and domestic markets – an issue which features prominently in Alistair Thornton’s assessments, too. Asked by The Diplomat‘s Jason Miks what he made of two of China’s macro-economic targets for 2011 – 4 per cent inflation and 8 per cent GDP -, Thornton replied that

An inflation target of 4 percent reflects the realisation that inflationary pressures aren’t going to recede as long as excess liquidity remains. Given they don’t want to jeopardize the broader economy, a relatively high bank lending target has been set, and inflation is just one of the inevitable side-products. There’s no point trying to pretend that inflation is going to remain at the abnormally low levels China has seen through the past 30 years.

Besides, an emphasis of China’s future growth model had to be on job creation, added Thornton.

China’s purchasing managers’ index (PMI) had decreased in June last year, from 53.9 per cent in May of the same year, to 52.1 per cent. Xinhua newsagency  found that encouraging. But in November 2010, the index was at 55.2 per cent, from 54.7 per cent in October, being the highest figure since April of that year.

A PMI of less than 50 would tell that the economy is contracting, Xinhua explained on June 3 last year. Anything more than 50 amounted to an expanding economy.

A summary by the Hongkong and Shanghai Banking Corporation (HSBC) of February 1 sees China’s domestic market as a key driver of expansion. In January rose sharply, too, notes the summary,

with panellists attributing growth to higher output requirements.

But apparently, output didn’t rise quickly enough to meet demand. Besides, high prices in procurement spelled high prices at sales, too.

Nothing serious, one might think. But in the light of stark differences in individual Chinese incomes, Beijing needs to take inflation very seriously.

Income inequality China was nearing the red line of what society can tolerate (接近社会所能忍受的 “红线”), chinanews.com wrote on October 4 last year, and it had become a big obstacle to development.

To “social stability”, too. Some of what the central government could do for people with small incomes – subsidizing housing, for example -, is being done,  and duly celebrated by its propaganda units. But distorting market prices isn’t necessarily the ideal or most sustainable approach. A tax reform with genuine teeth would be a better way to re-distribute incomes. Particular interests are in the way of that. Convincing approaches to control property prices (and therefore housing costs) were also discussed last year, but weren’t adopted, quite probably because they would have hurt the incomes of city governments, the state (especially local administrative levels) as the owner of land sold [*)] for property development.

But while the absence of inequality would lead to an absence of individual – growth-enhancing economic efforts, too high a degree of inequality doesn’t only destabilize society.

[E]xtreme income inequality was a precipitating factor behind the financial crisis,

argues Justin Fox, in a post on a Harvard Business Review blog. A documentary named The Flaw

certainly left an impression on [Martin] Sorrell [a CEO who watched the decoumentary]. “Wealthy people invest in financial assets; they create asset bubbles,” he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth.

If that is true for America, it’s about as true for China, where bubbles have been building for years. A few well-chosen punches against excess liquidity could prove much more efficient in fighting rising prices, than subsidizing some food or some flats. Besides, taxes would be much more macro-economic.

____________

Edited/updated
*) “Sold” isn’t the preferred nomenclature in this context. It should, of course, have been “transferred for money”, as the land is state property and can’t officially be sold — JR, March 16.

Related
Income Distribution: SASAC not Available, March 13, 2010
“When Reforms reach your own Connections…”, October 5, 2009

7 Responses to “Inflation: The Emperor’s new Thermometer”

  1. JR. This piece is definitely far ahead of the game. Requires a couple of close reads. Great stuff.

    For my minor value-added contribution, this caught my eye. Garnaut has the ability to tease out the essentials, and don’t let the title deter you.

    http://www.smh.com.au/business/china-wont-take-the-cairo-route-20110214-1atq4.html

    Like

  2. Yes, Garnaut teases out the essentials, every once in a while. Like he did there, early in 2009:

    Consumption is the second, and structurally weakest, engine of the Chinese economy. The problem is not that Chinese households save too much, as is often asserted, but that they have too little income in the first place.
    China under the Communist Party is rigged in favour of “insiders”, so that there isn’t much left for everybody else.

    In a way, that’s what I tried to describe in this post in some more detail.
    Strikes me right now that this blog mentioned the name Garnaut in three posts so far.

    To some extent, many of Garnaut’s articles seem to be notes on how corruption eats development away.

    Like

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