Today’s China Readings July 10, 2012

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Following the the lower than expected June CPI and PPI data, the bears have consolidated their position on the commanding heights of the media. This New York Times headline–China’s Economy: Apocalypse Soon?–sums up the fear and, at least in some quarters, the glee about the slowdown in China. Ironically, the article links to another New York Times story on the data–Price Data Suggest Specter of Deflation in China–that quotes uber ursus sinica Michael Pettis as saying the latest price data may have a silver lining:

Michael Pettis, a finance professor at the Guanghua School of Management at Peking University, said that falling prices could even be good for China. Chinese banks have allocated credit heavily to state-owned enterprises and politically connected individuals, who have prospered by borrowing money at 6 percent and investing it in an economy growing at twice that pace, before adjusting for inflation.

Households, which have few investment options available other than bank accounts, have paid a high price under the current system, earning only 3 percent in annual interest, or a quarter of the economic growth rate. The disappearance of inflation, and even falling prices, would help erase a huge annual transfer of wealth away from households and would help to rebalance the economy toward consumers, Mr. Pettis said.

Bloomberg reports on the stock market reaction in China’s Stocks Drop Most in Month on Economy, Deflation Concern, the Wall Street Journal tells us how Economists React: China Inflation Eases in June, and Bloomberg explains that the China Inflation May Let Wen Intensify Growth Efforts, as the sharp slowdown could lead to further stimulus measures.

I personally experience minimal deflation in my daily life in Beijing. In fact, prices of most things seem to be rising much higher than the CPI, and certainly wage growth is far outpacing the official inflation data. Tom Orlik tries to explain that in Inflated Confidence in China’s Falling Price:

Falling inflation would typically seem at odds with high and persistent increases in wages. In 2011, average wages in the private sector rose 18.3% on year. The first quarter of 2012 saw double-digit increases in the minimum wage in some provinces, and a recent survey of 4,242 employers conducted by Manpower suggests labor market conditions remain tight.

Rising wages put more money in consumers’ pockets and should pass through into higher prices. In China though, the relationship between wages and inflation is distorted by government control of prices for key goods and services. Prices for utilities, energy and public transport—together accounting for a big chunk of the consumer price index—are set by the government and maintained at low levels.

That means the CPI figure doesn’t tell the entire story of inflation in China. Price rises outside of the CPI basket can be much sharper…

In the short term, falling inflation means more room to support growth. Goldman Sachs expects the CPI to dip below 2% in July and one to two more rate cuts this year. But rapid increases in wages mean China’s respite from inflation will be shorter than the government—or the markets—would like.

Confused yet? Over the last couple of years we have had fear of inflation (China Hides Rampant Inflation in Money Binge: Patrick Chovanec – Bloomberg), then stagflation (Andy Xie: An inefficient public sector and negative real interest rates are pushing China toward stagflation and instability), and now deflation. The short China trade looks very crowded. Generally such a consensus about China, especially among foreigners, turns out to be incorrect. I am still in the “China will muddle through” camp, though it is getting a bit lonely.

In mid-June Boxun claimed that the Bo Xilai was verdict due before end of June (重庆消息：惩处薄熙来最迟六月底 谷开来另案处理). But as of July 10 there has been no official news of a verdict. Boxun was wrong, once again proving itself to be less a reliable source of China news and more a site that collects titillating, unreliable rumors.

John Garnaut recently wrote in Strongmen of China playing a risky game of thrones that:

Fourteen weeks have passed since Bo was toppled as party boss of Chongqing city and placed under some form of house arrest. It was widely billed as the biggest event in Chinese politics since the Tiananmen massacres of 1989, not least because Premier Wen Jiabao implicitly compared Bo’s Chongqing with Mao’s Cultural Revolution.

The Politburo is so factionally divided – and Bo subdivided it in so many personal and ideological ways – that they haven’t yet worked out how to frame his sins, even though he gave them rich material to work with.

That there has been no news after 14 weeks is in no way proof that “the Politburo is so factionally divided.”, or in fact divided any more than “normal”, whatever that may be. It certainly could be, but as of yet no one has reported anything that can be taken as conclusive evidence. In fact (as someone far more knowledgeable than I recently pointed out) it took over three years from removal to sentencing for Beijing Party Chief Chen Xitong (note the whitewashing of his Wikipedia entry) and almost two years from removal to sentencing for Shanghai Party Chief Chen Liangyu. An investigation of someone at the Politburo level is very complicated and delicate, even in the best of times, which 2012 is clearly not.

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