Inflation Stats: Not a Pretty Picture
Aggregated Source: China HearsayThere is not a whole lot to say about any of these numbers because they do little more than confirm the story of the past three years: China is stuck in an expansionary monetary policy and nothing the authorities have done to extricate themselves has had any effect, nor is it likely to until they address the currency problem. Most newspapers that reported today’s batch of numbers added that Chinese authorities announced last week that that China was switching its monetary policy from “prudent” to “tight”, but this announcement misses the point.
China does not have a monetary policy. It has an exchange rate policy, and as a consequence domestic monetary policy is largely a residual. In one sense it seems to me that they are finally addressing the underlying monetary problem by encouraging capital outflows, but this is simply another, albeit more powerful, way to avoid addressing the fundamental problem. Encouraging more and larger-scale outward FDI may take some pressure off the PBoC, but it runs the risk of pushing Chinese companies to invest outside of China before they are ready.
I’ve really come a long way on the RMB issue in the past three years, from being cautiously in favor of a slow and steady revaluation to my current support of a much faster liberalization. I still, however, do not see this issue as illicit "currency manipulation" and still do not believe the calls for an overnight 40% move. Greater speed is definitely called for at this point, though.
Another interesting point that Pettis makes is about the CPI, which I found cool, albeit from a geeky point of view. The CPI is a price indicator of a selected basket of goods, and the selection is not updated constantly but at periodic intervals. When you have rapid price movement, like we are seeing now, consumer choices shift to reflect relative price changes.
Therefore, as Pettis reminds us, if food made up 33% of the basket a while ago and food prices have since gone up faster than other goods, consumers will forego other purchases to make room in their "basket" for the higher-priced (but necessary) food items. I suppose that some food item substitutions mitigate this effect to some extent, but this is far beyond my area of expertise.
Anyway, that means that the CPI being used right now is a bit more out of whack than it usually is. If the CPI were adjusted to reflect a current consumer basket of goods, we would end up with higher inflation figures - Pettis suggests half a percent.
Original URL: Click here to visit original article
Copyright China Hearsay
Print This Post
|
Email This Post
(No Ratings Yet)
Loading ...