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Chinese inflation might be out of control

Daryl G. Jones 2010年05月21日


    One of the most popular debates in global macro circles currently relates to China and whether its economy is in a bubble. On the side of the bubble callers is one of the more successful short sellers of our generation, James Chanos. Admittedly, Chanos is usually on the right side of these big calls and, for the time being, I'm not going to debate him. Great Chinese bubble debate aside for now, how does Chanos's theory hold up in light of the data we've been reviewing?

    Data from various sources within China that we've seen over the past few weeks has pointed us directly toward one simple conclusion: China is experiencing serious inflation. Some of the keys for us include:

    • Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;

    • Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;

    • Chinese money supply growth was up 21.5% year-over-year in April;

    • Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and

    • Chinese industrial production was up 17.9% on a year-over-year basis in April.

    While economists in the United States continue to argue over whether the U.S. is experiencing meaningful inflation, there's little room for debate when it comes to China.

The direction in China: up

    Prices for consumers and producers are up, real estate prices are up double digits, and money supply is accelerating in a big way. The key factor is money supply. If it continues to grow, inflation will continue to accelerate.

    The beauty of the Chinese system, being a command economy, is that the leadership of the country can make real time economic decisions to adjust to the data they're getting. And we are already seeing Chinese leadership implement policies in the hopes of tempering these inflationary tailwinds.

    On the real estate front, the government has ordered 78 state-controlled companies to exit the real estate sector, banks are newly requiring a 50% down payment on second homes, and the Chinese government mandates 20% cash down at land auctions. Collectively, these actions should help slow the white-hot Chinese real estate market.

    The other key policy that Chinese government is implementing relates to bank loans. After a period in 1998 where the Chinese banking system was in effect insolvent, Chinese officials are rightfully cautious about rampant loan growth, for more than inflationary reasons. To combat bad loans and hopefully stymie inflation, reserve requirement have been raised three times for Chinese banks. Currently they're at 17% for large banks and 15% for smaller banks -- just under the all time high for reserves. In effect the government is forcing banks to park some money, making loans for the booming property market harder to come by.

    At risk of actually creating a bubble, Chinese officials cannot allow these inflationary factors to pick up speed. Therefore Chinese officials will likely continue to take policy actions to slow growth and cool inflation. These policies will have some predictable effects. But the most direct and knowable effect relate to commodities.

Chinese citizens have negative incentive to save: sound familiar?

    China is the world's largest producer of steel, and also consumes almost one-third of all global steel. As construction slows in China, the demand for steel and specific commodities related to construction, copper in particular, will slow on the margin. Any slowdown in Chinese demand will create a negative headwind for the prices of many of the commodities related to construction, but will also affect other commodities, like oil.

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