A half-year review on China’s combating inflation
Recently Premier Wen Jiabao chaired a standing meeting of the State Council, with the theme of stabilizing pork price. This is the third time in recent two weeks that Premier Wen mentioned the pork price. He emphasized that price stability of the meat market is the unavoidable responsibility of the government.
This little matter of pork price is closely related to people’s livelihood and may cause a big problem. The background of this piece of news is China’s June CPI hitting a new high of 6.4% in recent three years, and also that the CPI has risen by 5.2% during the first half year according to the new half-year economic report. Analysts say that the pork price hike is the major driver for rising consumer prices.(Data released by the National Bureau of Statistics on 9th of this month show that the pork price contributed more than 20% to the CPI in June).
In 2011, managing the inflation expectation will be an important work throughout the whole year, and also the top priority of the Chinese economic development. It could be summarized as “826”, which means the “8 new rules of real estate”, the 2 times of raising interest rates during the first half year, and also the 6 times of raising reserve ratio, revealing Chinese government’s great efforts. This paper will make “a special report about the mid-year finance and economy”.
“One pig pushes up CPI”
Yesterday, the electrical price screen of the Hangzhou Xianlinyuan Farm Produce Market shows that: cutlet (16-18 yuan/jin), spare rib (20-25 yuan/jin), pork leg (14.5-16 yuan/jin), pork chop (17-18 yuan/jin)(1 jin = 0.5kg).
Pig households who have suffered two year losses now feel quite relieved. New market information indicates that the price ratio that measures the swine production profit has surpassed 8:1, much higher than the breakeven point of 6:1. Pig households could nail their profits, but the whole society has raised concerns about the “heated” price, considering that the June CPI has reached 6.4%, a three year new high. Some people make a joking remark that “one pig pushes up CPI”.
People regard food as their first necessity. With the price rise of meat, egg, milk and grain, inflation pressures will be intensified. However, although the price rise of agricultural produce is an important driver for the new round of inflation, it is not the fundamental one.
“The current profits could only balance losses in the past two years.” According to Gao Zhifeng, board director of Hangzhou Huifeng Livestock Raising Company, after the pork price peaked in 2008, it began to slide from the second half year of 2008, and remained in a low range. This viewpoint was shared by
many big pig producers, but the problem stands out that even in those days when the pork price was low, the CPI also went up steadily and never witnessed a negative growth.
During 33 years, 1 million shrank of 850 thousand
It is quite necessary to review the statements made by Zhou Xiaochuan when he was interviewed by journalists from Xinhua News Agency in 2010,“in fighting against the crisis, both the fiscal and monetary policy will be expansionary. The Chinese government had purposefully expanded the money supply and was aware that this measure was aimed to combat financial crisis and ensure the stable and quick recovery of the Chinese economy. If not doing so the economy would suffer an incurable slide.”
Then besides the “4 trillion yuan”stimulus package, what was the total amount of currency issued by the Chinese government? Data from the Central Bank shows that in 2009, new additional loans granted by Chinese banks amount to more than 9 trillion yuan. If calculating by the broad monetary supply M2, in 1990 the remaining balance of China’s M2 was 1.53 trillion yuan, while this figure has reached 72.58 trillion yuan by the end of 2010. The M2 has increased by 46.44 during the past 2 decades, and this trend seems to continue.
People always use the M2/GDP as an indicator to show the proportional relation between the currency amount and the real economy. If this proportion is in a reasonable range, it would reflect the healthy development of an economic entity. Generally speaking, the bigger M2/GDP is, the more severe oversupply of currency would be. According to China Economic Journal, by the end of 2010, China’s GDP had reached more than 39 trillion yuan, 109 times of that in 1978; while the M2 had increased by 842 times from 1978 to the end of 2010.
The oversupply of currency may lead to very direct consequence, which is the fall of currency’s purchasing power and inflation of prices.
Liu Jianwei, chief investment financial planner and funds investing strategy analyst of Huitianfu Funds Company, calculated that the monthly average of the Chinese consumer price index (CPI) reached 4.81% from Jan. 1990 to Dec. 2009, concluding that the millionaire in 1978 would only have 150 thousand in terms of purchasing power, which shows that during the 33 years, the inflation has made 850 thousand shrink.
There is another very direct comparison: who has the stronger purchasing power between the millionaire now and ten-thousand earner in the 1980s.
Zhongwei, Professor of the Financial Research Center of Beijing Normal University, had once made a research on the average household income per capita and average deposit per capita, and made samples from four times points, 1981, 1991, 2001 and 2007, to measure the changing wealth of ten-thousand earners. From the perspective of deposit, the total deposit at the four time points amount to 53.2 billion yuan, 920 billion yuan, 7.4 trillion yuan and 17.3 trillion yuan respectively. After considering the change of population, the per capita deposit amounts to 52 yuan, 800 yuan, 5,900 yuan and 13 thousand yuan respectively. Therefore, the ten thousand yuan in 1981 was 200 times of the per capita deposit then, which is equal to 2.55 million yuan today.
What would be the pool to hold water-like money
The high mobility of money requires a pool to hold the money. The real estate and stock market have once played this role quite well. From Dec. 2009, the Chinese government tightened its control over the real estate market, which was followed by the rapid growth of food price including garlic, ginger and bean products. Shi Hanbing, a famous finance news commentator, stated in his new book“Our Solution in the Big Economic Situation” that this round of agricultural product rise was partly because of the change of supplydemand balance, partly because of the flow of money. The oversupply of money has to be used for certain purpose, and when the real estate market was controlled and the A-share market appeared gloomy, the money would not flow into the high-risky real estate market but other fields, which would trigger another round of price hike.
In fact, besides the agricultural products, some fields out of the spotlight before have also witnessed changes. Among the top ten cultural news released by the Xinhua News Agency in 2010, ranking second was a piece of news titled “Auction of Chinese Painting and Calligraphy Hit New High”. On June 3, 2010, the deal of “Dizhu Ming”, a calligraphy work by Huang Tingjian living in North Song Period, was closed with the auction price of 436.8 million yuan at Poly Spring Auction. Following this, the auction prices of Ai Henhu by Zhang Daqian and Baren Jishuitu by Xu Beihong also surpassed 100 million. Shi Hanbing said that the high velocity of money supply always coincides with the record prices of calligraphy and painting work being broken. A piece of calligraphy and painting worth RMB 100 million is just also an interpretation of the soaring inflation in a different light.
On Feb. 28, 2011, Xiang Songzuo, vice director and member of the International Monetary Research Institute of the Renmin University, said in his article that: since 1970s the global base currency or the international reserve currency has increased sharply from the 38 billion USD to 9 trillion USD, rising by over 200 times, but the real economy has increased by less than fivefold. The oversupply of money worldwide has led to the rampant excess liquidity, which is most lethal illness to the world finance and economy.
Overseas “Hot money”, exaggerated “exported inflation”
When talking about the current
inflation, many people would mention “hot money overseas” especially that the U.S. Quantitative Easing 2 exported its inflation to the world, with China also suffering the impact. Experts say the inflow of hot money has pushed up the grain price, oil price of the world staple product market, and increased the inflation pressures to the Chinese market, prompting the prices rise of grain, meat, egg, milk, edible oil, and diesel fuel. Also, the hot money has found it way into Chinese real estate and stock markets through various channels, to lift the real estate and stock prices and make common wage earners feel their income shrinking and wallet thinner.
The U.S. Federal Reserve QE2 dates back to the end of last year, with 600 billion USD planned to be used to purchase long-term government bonds, which could be interpreted as running the money press to print huge amounts of dollars. The Federal Reserve hopes that injection of money could stimulate domestic investment and consumption and invigorate the overall economy.
However, considering China’s tight control over inflow and outflow of foreign exchange, even if 1/10 of all the hot money flows into China, the tens of billions of dollars will pale into insignificance compared with the annual new loans of 9 trillion. In 2010, only a single Chinese real estate company Wanke achieved sales of more than 100 billion. If the hot money would flow into a certain industry, it might cause some influences, but if it is invested in a scattering way, its power will be largely weakened. Moreover, if we look at the time, QE2 was announced last year, while the domestic price rise, especially the real estate price, has lasted for many years. It seems very absurd to link the two things together. Therefore, we should be aware of the impact from the overseas hot money, but could not exaggerate the power of Federal Reverse to ignore what are really fundamental to the inflation.
(The author: from Qianjiang Evening Paper)