Chinese Economics Thread

[Norfolk]

The BBC is reporting today that the Chinese Government has imposed temporary price controls on

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:

Retailers and producers will face heavy fines if they increase the price of basic necessities, the government says.

Food prices climbed more than 18% in November, while the price of pork jumped by more than 50%.

Inflation has traditionally been associated with civil unrest in China, and correspondents say the intervention shows the government is very concerned.

During the past 20 years, the Chinese administration has largely abandoned price controls, as the free market took hold across the country.

The price of basic essentials has increased hugely during this time, and families on low incomes - numbered in their hundreds of millions in China - currently spend between 30% and 50% of their income on food for the table.

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:

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by James Fallows.

 

[Player 0]

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.

 

[SampanViking]

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

Well I have read it and if it is a little shallow, it is interesting in its demonstration of American thinking on the matter and perhaps more importantly, how little it understands the Chinese perspective.

I have no doubt that China has used America as a starter engine for its own Internal economic demand and what we are seeing now is a natural move away form US dependence and towards an economy more balanced between its global exports and domestic demand.

Many factors are now driving this movement process, many of which must have been forseen for a long time, including the loss in value of the existing T Bills as now being witnessed. The important thing has been to keep the engine running and to convert as many farmers into industrial workers as possible, but without allowing the inflation by demand or exchange rate values that push down hard on the hundreds of millions of farming families that have yet to be included in the economic miracle. I notice that the author missed this point completely.

The report is also somewhat out of date as large sums of money are now being earmarked for infrastructural development in the interior and are announced just at the time when market forces are pushing development inwards naturally. This does rather suggest a much higher degree of planning by the Central Govt in not wasting money on premature investment that may otherwise have become inadequate, poorly maintained or otherwise seriously depreciated, by the time they were actually needed. This may seem rather harsh, but the provision of modern services, road, rail, airports, hospitals and schools etc, provides a substantial economic boost to these areas by providing a large number of middle class jobs that present the relocating Coastal Professionals and Skilled workers with a standard of living and environment similar to that which they will have left behind. This duality strengthens the process, while either one on their own would run the risk of withering on the vine.

The Blackstone incident although seemingly expensive in market terms is modest in Government spending terms and the current losses "buy" the Sovereign Funds the right to severely criticise future attempts by Western Governments to try and dictate the manner by which these funds are invested. So if $2 Billion buys increased freedom in options for $300 Billion investment funds, then this loss will appear minimised and be quickly offset by the increased gains that it has enabled.

The bald truth is that the US is no longer capable of sustaining Chinese growth and had exhausted its credit through its activities so far. Further growth therefore will need funding from alternative markets and again, if managed properly, initial losses through dollar value declines are likely to be off set by greater future gains from alternative export and domestic markets.

 

[Deleted member 675]

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.

 

[SampanViking]

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.

 

[Deleted member 675]

To date the CCP has been content to let food prices rise as they have increased the value of farmers incomes

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.

 

[SampanViking]

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.

 

[Deleted member 675]

Raising Interest rates isn't going to do you any good here Fu.

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.

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.

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.

 

[Norfolk]

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) 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:

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[sumdud]

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