Chinese Economics Thread

Discussion in 'Members' Club Room' started by Norfolk, Jan 10, 2008.

  1. Norfolk
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    Norfolk Junior Member

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    The BBC is reporting today that the Chinese Government has imposed temporary price controls on basic food staples and fuel:

    More at the link.

    This is a little unsettling, particularly when the U.S. economy is in the midst of economic troubles of its own occasioned by the mortgage default crisis. James Fallows wrote an interesting piece in the January/February 2008 edition of The Atlantic Monthly on the present interdependent economic relationship between China and the U.S. In it, Fallows describes how Chinese Government policies on economic and social development intended to minimize the potential for major disruptions, coupled to the effects of the decline in value of the U.S. dollar on both the purchases of Chinese manufactures and Chinese investments in U.S. securities, taken together may in effect conspire to bring about a serious economic and subsequently political break between the two countries and serious social and political instability, particularly within China. It's only four pages, and well worth the read: "The $1.4 Trillion Dollar Question" by James Fallows.
     
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  2. Player 0
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    Player 0 Junior Member

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    It's the same in Hong Kong now, where the SAR government has imposed limits on the prices that can be set by the electricity company, due to the fact because demand is so high now the companies think they can charge more for it.

    Although there are of course normal market forces like increased spending and consumption by the mainland market, i do believe it is the changes in the US' political winds that are prompting these actions, just as the visit to China by Fukuda the new Japanese PM, in where some progress looks like it has actually been made on the relationship between the two nations.

    This is somewhat unusual given the lackluster attempts at reconciliation between the two sides since China's economic boom, however i think it's due to the fact that the democrats looks to be more and more likely to come into power after Bush leaves, and they are significantly more protectionist than the republicans.
     
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  3. SampanViking
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    SampanViking The Capitalist
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    Hi Norfolk

    Player posted the link to your report in NCCF and so out of courtesy I think it is only right I post a copy of my response here as well

     
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  4. FuManChu
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    FuManChu Senior Member

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    Hmm, as the article says I'm not sure how temporary price controls will change much. I haven't seen anything to suggest inflation is caused primarily by profiteering. When it's because the cost to the seller rises, he'll simply stop selling stuff - he won't give it away at a loss.
     
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  5. SampanViking
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    SampanViking The Capitalist
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    I think including the food article with the Forex/Dollar issue here is a bit of a red herring.

    Over here in the West we are seeing Agricultural Commodity Inflation, due to higher grain and Fuel prices, but the factors driving Chinese food inflation is rather different.

    In China it is rocketing demand from a rapidly growing number of Industrial workers and increasing workers pay, not being able to be met by China's subsistence farmers, which is resulting in increasing food exports at market values to take up the slack.

    To date the CCP has been content to let food prices rise as they have increased the value of farmers incomes (although subsistence method inefficiency means most potential gains are not realised and there are virtually no external fuel or grain inputs to worry about.

    The controls will have been introduced, as now the benefit to the rural community of rising prices is being offset by the cost to the urban poor, who need to be kept sweet and who need to enjoy a life still good enough to encourage the ongoing flow from the land to the factory.
     
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  6. FuManChu
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    FuManChu Senior Member

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    They have to let prices rise at least somewhat to match inflation. However, they can't artificially hold them down because of higher demand or increasing cost. If people are making a loss they'll stop producing/buying and distributing. That will then push prices up even higher - it's a vicious circle.

    The only way to deal with inflation is to increase interest rates. The government has waited too long to do that - the recent changes have not been enough. If it shies away from taking hard but necessary measures things will get worse, not better.
     
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  7. SampanViking
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    SampanViking The Capitalist
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    Raising Interest rates isn't going to do you any good here Fu.

    China's inflation is all demand led and occurs almost entirely in Fuel costs, which are largely absorbed by Industry and Food Costs. As most of China's food is produced by subsistence farmers whose limited contact with the cash economy is restricted to savings and out of pocket expenditure, they are unlikely to have loans or even purchase inputs for their produce.

    On the demand side, what effect are interest rates likely to have (except spread misery artificially to non inflationary areas of the economy) that higher prices cannot do by themselves.

    The problem here is an inability to produce food to the output levels of modern farms using intensive methods. Higher Interest rates will do nothing to encourage the investment that any rural entrepreneur would need to find if they tried to go that route. If anything lower rates or special soft loans (along with rural land reforms) are the best solution to try and encourage an effective production response to the current situation.
     
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  8. FuManChu
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    FuManChu Senior Member

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    I'm not sure how much it would affect food prices, but clearly it can affect overall inflation - otherwise interest rates wouldn't have been raised as they were last year.

    I disagree, because that will just cause inflation elsewhere to increase and cause the same problem in another sector. Overall inflation will increase even faster, then maybe the farmers will have to put up prices anyway to cope.

    If China can't feed itself then it needs to import more food, or put more land aside for agriculture, rather than build factories and luxury appartments.
     
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  9. Norfolk
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    Norfolk Junior Member

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    Hi SampanViking:)

    I rather agree that there is an element of "Mirror-Imaging" that has to be accounted for and filtered out, if possible, from many Western reports and analyses on anything non-Western, including China. And of course it is all to easy to for hackles to be raised (I still have mine, by the way, from my old Army days:D) by Western perceptions of Chinese intentions and actions; the whole "Yellow Peril" bit and all.

    But I do find myself inclined to Fu's takes on this situation. When it comes to anything economic, I go by two simple guidelines: for micro-economics, buy low and sell high!; and for macro-economics, well, when anything gets built, made, or offered for sale, the money to pay for it has to come from somewhere, and there's only so much to go around - so who's paying for all this, and how? Hence my mounting trepidation over the past few years at what has developed into the mortage crisis in the US and inflation in China. There just isn't enough free hard cash to go around to pay for all the debt that has accumulated as well as all the goods and services that have been produced. And I fear that these may be indications of more serious economic weakness either to develop or to reveal itself.

    It seems to me that Chinese Government policy tries to balance the requirement for relatively inexpensive food and labour with the need of the population, both urban and rural, to be able to see at least steady personal financial improvement, whilst relying to a considerable extent upon the export market to achieve that. Anything that disrupts or may disrupt that steady personal financial improvement creates conflict with the basic expectations of most Chinese. And that is often touted as perhaps single most important factor in maintaining social and political stability within China.

    As to Chinese monetary policy and forex investments, I quite agree that its end is not profit per se, but rather is an instrument wielded to acheive strategic economic ends. Namely, the safest, most predictable, and controllable development of the national economy of China as is practical. As you pointed out about the investment in Blackstone, what's $2 billion in exchange for opening up solid (and potentially lucrative) investment opportunities for $300 billion? It's largely irrelevant that the Blackstone investment in and of itself was an early loss, profit-wise; it's what doors to bigger and better things that that investment opened that counts. You have to spend money to make money. And that's one way China may be able to unhitch itself over time from debtors if such debtors were to prove unreliable in paying their debts.

    But at the present, China may find itself in a tight situation, as both its own internal economic pressures, and especially that of inflation, coupled with US economic weakness and the devaluation of the US Dollar and US securities, may combine under the right (ie. wrong) circumstances to create a much more difficult situation than either China or the US is able to handle well.

    Here's Michael Pettis' blog entry today on the temporary price controls:

    "China wants to force inflation down. Can it?"
     
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    Last edited: Jan 10, 2008
  10. sumdud
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    sumdud Senior Member

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    I don't know my economics, but isn't the market really just a communal ponzi scheme?
     
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