It is pretty amazing that China has experienced rapid growth without rate hikes for electricity, but such has been the case for two years. The resulting power shortages are getting dire according to “China Raises Power Prices as Shortages Loom“:
“China’s electricity demand is running so far ahead of supply that it is expected to be short of 30-40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11.”
China is hiking rates by 3% for some users in an apparent effort to cool demand and/or encourage the production of more supply. It is feared that increases in supply will only further drive up the price of coal and offset any profits power companies would have otherwise earned.
Nightly Business Report produced a short video segment describing China’s inflation woes (transcript included) called “China’s Inflation Battle.” The commentator identifies China’s RMB¥ 4 trillion stimulus program (about $585B USD at the time) as the original source of the inflation and takes us to Pengshui, 1000 miles from Beijing, to see some of the examples of how inflation is impacting the lives of the average Chinese person.
The most interesting quote came from Associate Professor Patrick Chovanec of Tsinghua University, School of Economics and Management:
“When you see over 50 percent growth in the money supply, the question isn’t, why is there inflation? The question is, why isn’t there more inflation? Why haven’t we seen it sooner? The reason is because a lot of that money didn’t go into a consumption boom. It went into an investment boom.”
It is a scary thought to think inflation problems could (will?) get even worse once the Chinese figure out how to make use of all this massive investment.
In “Beijing turns to currency to cool inflation“, the Associated Press gives a good summary of China’s current problems with inflation, including the following:
“Economists blame China’s inflation on the dual pressures of consumer demand that is outstripping food supplies and a bank lending boom they say Beijing allowed to run too long after it helped the country rebound quickly from the 2008 global crisis.
Attempts at price controls, subsidies for the poor and orders to local leaders to guarantee adequate vegetable supplies have had mixed results.”
The failure to control inflation to-date is forcing China to allow the currency to appreciate faster. The near-term increases still seem modest at 5% (against the dollar), so it will be interesting to see whether China continues pushing harder on non-currency methods.
China’s currency is not traded on open markets, but if it were, it seems the currency would soar given current conditions.
I typically ignore most of the inflation numbers reported by the government, but I could not resist reading Calafia Beach Pundit’s latest piece titled “Consumer price inflation is heating up.” Calafia takes a look at the CPI from all angles, month-over-month, year-over-year, rate of change, and even non-seasonally adjusted (which is the basis for payments to TIPS). Calafia convincingly demonstrates that all arrows are pointing upward for inflation. He even concluded that China’s current struggles with inflation will be America’s future inflation problem:
“The ongoing rise in China’s inflation rate is making headlines today, but U.S. inflation is not too far behind, as this chart shows. It’s not surprising that inflation should be moving higher both in China and the U.S., since China has essentially outsourced its monetary policy to the U.S. Federal Reserve by pegging the yuan to the dollar. Chinese inflation is somewhat more volatile than ours, and that is also not surprising since its economy is smaller and less burdened by long-term supply and labor contracts. If China has an inflation problem, then so does the U.S. It will just take longer for the problem to become obvious in the U.S.”
This piece is a must-read.
Disclosure: author is long TIPS
In “China inflation may hit 6 pct, no end to tightening -paper“, Reuters reports that the official China Securities Journal insists fighting inflation is the number one job for monetary authorities. Given a consumer price index hitting 32-month highs in March and likely to rise as high as 6% this year, China will continue to hike rates to thwart these inflationary pressures.
Yesterday, China’s central bank increased interest rates for a fourth time in six months.
In “China says cannot lower guard against inflation“, Reuters reports that “China’s Premier Wen Jiabao said on Saturday inflation was affecting social stability, and taming it was a top priority for this year…The government is aiming for annual average inflation of 4 percent in 2011, higher than the 3.3 percent rise in consumer prices last year.”
The article notes several measures Chinese authorities are taking to curb inflation, everything from increasing food supplies, reducing transportation costs, and controlling the money supply and bank lending. These measures seem to be working, but the Chinese are not declaring victory just yet…
China raised interest rates for the third time in four months as the scramble against inflation continues. For a good accounting of the move and its implications see “China raises rates to battle stubbornly high inflation.”
China’s scramble to battle inflation continues. On Saturday, Christmas Day in many parts of the world, the People’s Bank of China raised interest rates 25 basis points. The benchmark one-year lending rate is now 5.81%, and the one-year deposit rate is set to 2.75%. More details and analyst commentary on Bloomberg: “China Increases Interest Rates to Curb Its Fastest Inflation in Two Years.”
In “Chinese Consumers Signal Deepest Concern With Prices Since 1999“, Bloomberg reports that inflation expectations are definitely not contained in China.
A survey conducted by China’s central bank reveals troubling trends in inflation expectations amongst the Chinese people on the heels of the biggest increase in price levels in 28 months and food costs soaring 12%:
“A price satisfaction index fell to 13.8 this quarter, the lowest level since data began in the fourth quarter of 1999, the central bank said on its website today.
In total, 74 percent of households considered prices too high, up 15.6 percentage points from the third quarter, the central bank said. Its fourth-quarter survey was of 20,000 households in 50 cities.
Inflation expectations are ‘intensifying,’ the central bank said, with 61 percent expecting price gains in the next quarter. In the previous survey, the proportion was 46 percent.”
We have chronicled on these pages China’s struggles with inflation. It appears the pressures are only getting worse. Bloomberg reports “China Inflation May Be Too Hot for Controls Amid Cash Glut“:
“Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.”
“Premier Wen Jiabao’s cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.”
It seems consumption is declining in the wake of this inflation, but not fast enough to cool prices down. The Chinese government is worrying even more about what will happen to the many millions of poor people who may no longer be able to afford the little food that they currently consume.
Reuters reports that a senior Chinese government economist has warned that China will not meet its 3% inflation target. He suggests a 5% target instead. See “China inflation target may be out of reach: economist.”
It is also interesting to read that China feels constrained by the monetary policies of its trading partners:
“Ba Shusong, another senior researcher at the DRC, said the central bank would likely be cautious in raising interest rates, preferring instead to use quantitative tools, such as open market operations and required reserves, to manage liquidity.
“The ultra-low interest rate policy stance adopted by the United States and some other countries actually give China very limited scope to raise interest rates,” Ba told the forum.”
As of May 10, China will increase the reserve ratio requirement for banks 50 basis points. Currently, the biggest banks must maintain a 16.5% reserve ratio while smaller banks must maintain 14.5%.
Bloomberg reports that this third increase for the year may still prove inadequate to tame China’s inflation threat. Chinese officials continue to reassure markets that monetary tightening targets rampant speculation in real estate and that policy remains accommodative for the rest of the economy.
Reuters reports that “China Steps up Fight Against Property Speculation“:
“Provincial and municipal governments in areas experiencing rapidly rising property prices may temporarily restrict the number of properties people may buy, in accordance with the situation in their jurisdictions, the State Council said.
The measures also made clear to banks that they would be expected not just to raise mortgage rates and down payment requirements, but to refuse credit to people who are clearly buying homes for speculative purposes.”
Specifically, banks are being asked to increase down payments and mortgage rates for people who already own two homes or more.
Apparently, China has a working definition of an asset bubble and is getting increasingly proactive about preventing (or slowing down) rampant asset inflation.
Reuters reported that Australian miners are seeking a 40% increase in contracted iron ore prices for 2010. This is in stark contrast to the 20-30% increase that the China Iron and Steel Association expected for 2010. The differential could lead to more contentious price negotiations – similar to what occurred at the beginning of 2009 – especially given some nervousness about whether steel demand will continue to increase robustly this year.
Times Online is reporting that property prices in China rose 7.8% year-over-year in December – the fastest pace since 2008:
“Property prices across China’s 70 largest cities surged at their fastest pace since 2008 in December, stoking rising anxiety in Beijing that a speculative bubble may be forming and that Chinese banks may have issued more than £70 billion in new bank loans since January 1.
Residential and commercial property rose an average 7.8 per cent from a year earlier in December, according to data from the National Development and Reform Commission – far higher than the 5.7 per cent year-on-year rise in November and a number that disguises the more rabid clip of property price inflation in cities like Shanghai and Beijing.”
The World Steel Association (worldsteel) forecasts for 2010 confirm my earlier view that steel demand (and production) most likely bottomed this year and some kind of recovery is underway.
Worldsteel’s forecasts indicate that demand for steel in 2010 will return to 2008 levels after contracting in 2009 by 8.6%:
“The World Steel Association (worldsteel) is forecasting that apparent steel use will contract worldwide by -8.6% to 1,104 mmt in 2009 after declining by -1.4% in 2008. This is an improved figure over the spring forecast issued in April 2009 which predicted a decrease of -14.1%. The improvement is largely due to the exceptionally strong growth in steel demand in China. With signs, from the beginning of the second half of 2009, of a recovery across the world now apparent, global steel demand in 2010 is forecast to grow by 9.2% to 1,206 mmt which is a recovery to the level of 2008.”
While Chinese steel demand should account for 48% of the world’s apparent steel use, Worldsteel does not expect Chinese growth rates to lead the way next year (“ArcelorMittal chief surprised at China’s steel demand outlook“). Chinese growth will drop to 5% while regions like the U.S., India, and the EU-27 will experience double-digit rates of increase.
The Wall Street Journal reports: “China Targets Commodity Prices by Stepping Into Futures Markets.”
Apparently, China is worried enough about increasing prices in various commodities that it is trying to fight back by creating more of its own futures markets. For example, speculators in commodities may drive up prices in anticipation of Chinese consumption patterns. Chinese officials hope that by having their own futures exchanges, they can generate prices that are more closely tied to Chinese supply and demand dynamics. This is important given China is a significant player in many commodities. The WSJ indicates that “China buys 10% of all crude oil, 30% of copper output and 53% of the world’s soybeans.” Additionally, “the 165 million contracts in white sugar that changed hands on the Zhengzhou Commodity Exchange last year made it the most-active commodity future anywhere.” China’s next target is a an oil futures market given it spent $160B on oil last year.
Given that China remains a communist country “in transition,” I wonder whether China creates these markets as mechanisms for allowing the government more direct controls over pricing. Indeed, the WSJ states: “…the big footprints in China’s futures markets belong to state-owned groups, primarily commodity trader Cofco Corp. and Beijing’s secretive stockpiling agent, the State Bureau of Material Reserve.”