Much bark, little bite

With somewhat slower economic growth and an increasingly clouded outlook in the global economy, I have been wondering what Chinese policy makers would really like to do amid stubbornly high inflation.  Yesterday, we had Brazil cutting rates, which baffled some analysts, but tells you that some emerging economies are worried about growth.

If anyone has been hoping that the Chinese policy makers would start easing, as I have repeatedly pointed out, there is no reason on the inflation front why they should do so. Still, as Victor Shih and Carl Walter pointed out recently, China may prefer inflating the problems away, and credit crunch is more of a concern for the “ruling class” (if you like) than is inflation.

And we must keep up appearances so yesterday Wen Jiabao came out and said that inflation-fighting remains a top priority, and that the government will continue to curb property prices.  AFP quotes Wen Jiabao saying that:

Currently our country’s economic development is still facing a very complicated domestic and external environment that is unstable and fraught with many uncertain elements, [but] stabilising overall price levels remains the priority task of our macroeconomic controls (and) will not change.

I welcome this if he is going to do what he says. Although that would put the economy at risk of hard-landing/recession (whatever you would like to call it), it is unavoidable if China is serious about curbing inflation.

If he really means what the government and central bank will do, I think it would be fair to expect more monetary tightening from the People’s Bank of China down the road.  I do not expect aggressive action, however, as the global macroeconomic slowdown will inevitably hurt the Chinese economy as external demand contracts, and that is already happening, as we have just seen it in the latest PMI figure.  One or two rate hikes and/or reserve requirement increase by the end of this year would be the most probable outcome, unless we see a more rapid deterioration in the global macro picture.


  1. I like how your spell the Premier’s name as “Wen Jiabao” instead of the western way.

    I think that was just a message to calm the general population, not directed at the market. But they are smarter than actually heading down that road regardless of the slowing growth.

  2. This recent Stratfor item published by John Mauldin sheds some light on Brazil’s logic

    “The macroeconomic strategy of the current regime, along with that of a string of governments going back to the early 1990s, is known colloquially as the “real plan” (after Brazil’s currency, the real). In essence, the strategy turned Brazil’s traditional strategy of growth at any cost on its head, seeking instead low inflation at any cost. … Credit —whether government or private, domestic or foreign — was greatly restricted, working from the assumption that the Brazilian system could not handle the subsequent growth without stoking inflation. Government spending was greatly reduced and deficit spending largely phased out on the understanding that all forms of stimulus should be minimized to avoid inflation…

    But the real plan is not an orthodox economic policy. Economic orthodoxy stems from the belief that constrained credit, limited government and low inflation are policy tools designed to maximize growth. Orthodox policies are means to an end. The real plan approaches the question from the other side, in which strong growth is the enemy because it causes runaway inflation that destroys economic, political and social stability. As such, constrained credit, limited government and low inflation are the goals of the real plan, not the means. The distinction is sufficiently critical to bear repeating: Growth is the enemy of the real plan, not its goal.

    What results is not so much a difference between perception and reality but between what the Brazilian government intended and what the international markets perceive those intentions to be. Investors across the world believe the real plan’s ends are in actuality its means — and they interpret those ends as being in perfect sync with their interests. Thus, foreign investors have been voting for Brazil and the real plan with their money. Inward investment to Brazil is at historical highs, with the Brazilian Central Bank projecting the country’s 2011 foreign direct investment take at a stunning $60 billion.

    All this money is working against the real plan’s goals: introducing credit where the government seeks to constrain credit, overfunding banks that the government wants to keep tightly regulated, encouraging spending that the government deems dangerous. Brazilians may be feeling richer because of the cheap, imported credit, but for government planners the environment is becoming ever more dangerous, threatening the hard-won stability that the real plan seeks to sustain. At the time of this writing, annualized inflation has edged up to 6 percent, right at the government’s redline.”

    From reading this it seems to me Brazil wants the “hot money” to go away and one way to do this is to reduce interest rates.

  3. Isn’t it what all politicians suppose to do? In a system where one party represents ALL interests what we can expect? The legitimacy of the party is to represent of “majority” of Chinese people.

    However what we have observed is increasingly Chinese people is moving backward in term of income growth. Inflation is transferring wealth out of majority people into minority elites.

    Interestingly, majority economists are predicting Chinese inflation has peak.

    I like the summary from professor Chovanec

    “The real problem: China wants a correction without having a correction. Good luck with that.

    • ‘The real problem: China wants a correction without having a correction. Good luck with that.’

      Not unlike the rest of us! A global wish.

  4. The hubris is incredible, surrounding monetary policy.

    Nothing wrecks an economy worse than having ALL “urban growth” captured by “planning gain” “gamers”. Eliminate this, and you will save your economy a LOT of trouble later on. This trouble cannot be cured by monetary policy.

    What is going on in China is a disgrace. Millions of poor people should be moving in to affordable new apartments – but the apartments are priced out of their reach BECAUSE speculators capital gains (including local officials) are built into the price.