Pork Prices, PBOC, And The Monetary Policy Game Of Chicken8 July, 2011, 21:29. Posted by Zarathustra
Tags: Economy, Inflation, People's Bank of China
Tomorrow morning (Hong Kong/China Time, of course), the National Bureau of Statistics of China will be publishing the latest set of inflation numbers, along with other figures. I will be following those data, as usual.
As far as inflation is concerned, the market is expecting the consumer price index to rise 6.3% on an year-on-year basis, which will be way above its target (we will come back to this below). As pork prices increase, the Wall Street Journal quote a Weibo (i.e. a twitter-like service in China) user saying that “In a country where our industry and economy are growing quickly, why is it so hard for the everyday man to get his food?”. Obviously, this is still an serious issue, but most (including myself) are expecting inflation to moderate later this year as monetary tightening bites.
The same report by the WSJ also has a rather interesting side effect on the monetary tightening. It says:
China’s slaughterhouses have generally been short of working capital, which means that they have little cash to buy pigs from the farmers. The government’s move to cut credit means that the slaughterhouses have even less cash to work with.
The perverse consequence is that tightening monetary policy to control inflation actually reduces the supply of pork, contributing to the higher food prices that are the proximate cause of inflation.
So these people are blaming the People’s Bank of China for making matters worse. But it also tells you how hopeless the policy makers are in manipulating the economy: they get one part right, then probably 10 other parts wrong.
Speaking of the People’s Bank of China, a really short report from Reuters quotes the PBOC governor Zhou Xiaochuan saying that:
China will tolerate some inflation as the country presses ahead with its transition from a centrally planned economy.
He was talking about long-term trends but did not give any specifics.
It is not quite so clear what he really means here, especially if he was indeed talking about long-term trends. In another report, Zhou is quoted saying the inflation is not the only monetary policy target. Other targets include economic growth, employment, exchange rate and balance of payments. Too many targets? Probably, as Russell Napier once said that central bankers “are quite good at screwing things up with one target”, now the Chinese central bankers have 5 targets.
But let’s focus on growth and inflation. As mentioned a couple of times, Chinese policy makers in dilemma are making pretty divided opinions about the future course of inflation. We have the Premier Wen Jiabao who are confidentonly when the inflation target is raised from 4% to 5%, the Vice Premier Wang Qishan who is feeling not so sure, and a central bank governor who is suggesting that that inflation is not the only thing they should care about.
Yesterday, I mentioned that changing the target is an easy way to meet the target (rig the data is another one, of course). Now, it is getting a little more obvious that perhaps the Chinese leadership is more concerned about growth than price stability (at least some of them are). Here, I regurgitate the prediction I had in the beginning of this year on China:
I think one likely bearish scenario is that the government and the central bank will continue to tighten policy in hope to stop inflation and make homes affordable. But their piecemeal approach is not going to help the matter. The government may, at some point or another, recognise the need to tighten the policy more significantly. If aggressive tightening led to rapid slowdown of the economy and large drop in real estate prices, the government would then turn to expansionary policy again, which will not be helpful because the burst of real estate bubble often led to prolonged drop in home prices and deflationary pressure. When will that happen? No one knows for sure, but there are probably no bubbles that would not burst.
Alternatively, in a more positive scenario, the government may turn to expansionary policy even if there is only a slightest sign of slowdown. If that is the case, the problem of inflation and asset bubble will never be solved, and the country is either going to be overheating or in a stagflation. Eventually though, they have to let the bubble burst. Certainly, if you let the bubble to inflate larger before letting it bursts, the consequence will be even more severe when it finally bursts.
In the first half of this year, we have obviously seen the government opting for the first option by tightening policy ever more aggressively. Now, it seems that the leadership is getting much less certain. For those who hope that monetary policy will be loosen, e.g. real estate developers, small businesses and others who are struggling with their finances, they are playing the monetary policy game of chicken with policy makers.
Who swerves first?
As said yesterday, it is now all about what the government will or will not do. As of today though, policy makers seem be pretty confused. In turn, we are also confused about the confusion Chinese policy makers have.