Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


Chinese growth accelerates, RMB depreciates

by Brad Setser
July 19, 2006

That was yesterday’s headline.   Or, given the time differences, perhaps the headline from two days ago. Chinese second quarter growth picked up to 11% plus.  The only real surprise here was that the Chinese government reported an acceleration rather than a smoothed number.   And the RMB moved back into the 8s on Tuesday and started Wednesday there as well.    The basket peg you know.  If the dollar appreciates v. the euro, the RMB needs to depreciate.  China has to make sure its products are competitive in Europe. 

I am not sure where to begin.   

Survived Sars lays out why China would be well served by RMB appreciation.    Yu Yongding has made the case as well.    And I am pretty sure he has a line into the PBoC.  

There is now even a bit of price pressure in China.   Inflation remains well below US levels, but it is creeping up …  for all the talk about how China’s integration into the global economy would be deflationary, right now China sure seems to be putting upward pressure on prices globally.

And who knows, with the anniversary of the RMB’s initial step revaluation approaching on the 21st, China might even surprise us — despite their promises not to.   But if they did, I would really be surprised.   The striking thing to me – and many others – is that China hasn’t made use of the flexibility that it created over a year ago. 

Another striking thing – at least to me — is the extent that the policy process remains paralyzed inside China.    George W. Bush’s foreign policy seems to be to be premised on not making hard decisions and hoping Iraq (maybe the entire Middle East?) becomes someone’s problem in 2009 – while praying that the financial flows needed to sustain a no-savings economy don’t give out in the meantime.   China’s exchange rate policy seems kind of similar.    Do nothing (Ok, fiddle around the edges) and hope the problem – the pressures that rapid reserve growth places on China’s domestic financial system, no matter how hard China tries to limit or suppress these pressures with administrative measures — goes away.

So far it hasn’t.  Read Obstfeld.

Another striking thing, at least to me, is that with oil above $70 and domestic oil demand increasing rapidly (all those new cars), China’s trade surplus is expanding.   I certainly wouldn’t have expected that China would be paying roughly twice as much for imported oil as it did two years ago and still have a growing trade surplus.    Nor would I have expected two years ago that Chinese exports would still be growing at 25% off by now a very large base. 

My surprise can be expressed differently: China is in the midst of one of the biggest investment booms the world has seen in a long time.   And its current account surplus is still growing, because savings has grown even more. 

A final surprise:  according to a new synthesis study of China put out by Edwin Lim, Michael Spence and Ricardo Hausmann (under the aegis of the center for international development at Harvard) , household disposable income (think wages) is declining as a share of Chinese GDP – and profits rising as a share of Chinese GDP.  I guess China’s economy is more like that of the US than anyone thought.  Enterprise savings now matches household savings (see p. viii of the Lim report) – and they are growing faster.

But that certainly isn’t what one would expect if a labor-rich capital-scarce economy is integrated into the global economy.  Global demand for Chinese labor should push up the wage share of GDP – and, with capital less scarce, profits should fall.   

I suspect part of the explanation for this puzzle is that China is both slowly reversing communist-era policies that suppressed profits even as it integrates.   That may explain why over-capacity doesn’t lead to fall in investment as well.  Just a hunch.

But, to paraphrase Robert Rubin’s comment to the effect that no one predicted that a large number of exchange rates wouldn’t adjust in the face of substantial pressures for adjustment, I don’t think anyone would have predicted ten years ago – or even five years ago — that Chinese integration into the world economy would lead to downward pressure on labor income relative to Chinese GDP, an investment surge that took investment to around 50% of Chinese GDP, and even bigger surge in savings — and massive financial flows from China to the US.  Judging from the survey data, $190b in Chinese lending financed about a quarter of the US current account deficit from mid 2004 to mid 2005.

Garber, Dooley and Folkerts-Landau did predict this.  I said no one would have predicted all this five years ago for a reason.   Their seminal article didn’t appear until 2003.  They still deserve a lot of credit – it is hard to make a bold call and get it more or less right. 

Back when I first started to write about China, China had around $515b in reserves.   Check out its stated reserves at the end of September 2004.    Really it had around $560b then, counting the $45b reserves that were transferred to the state banks.    Today China has $940b in reserves.  Probably more – we are now well into July, and China didn’t push its exchange below 8 without buying a few dollars. 

Indeed, using my metric, which includes reserves transferred to China’s state banks, China already has $1 trillion in reserves.  Add $60b to $941b …    They formally will have over a trillion by the end of the third quarter.   

Reserves will have doubled in two years.  They are rising by about $250b a year.  Sure that includes some valuation gains on China’s euro reserves (not on the euros it bought before September 2005, but on the euros it bought between the end of q2 2005 and the end of q1 2006 … ).   But that is still a pretty impressive growth rate.  China’s current account surplus has grown even more.  

So my question to China’s leadership is simple:  What is your exit strategy?   Do you intend to add another $500b, maybe more, to your reserves over the next two years?  Another trillion, maybe more, over the next four?   

Do you think that exports can continue to grow at a 25% annual clip for the next two years?   The next four? 

By my calculations, that would take monthly Chinese goods exports from around $80b now to around $200b.   25% growth for two years implies a monthly total of more like $125b.   

I recognize that my credibility is a bit limited since I certainly did not think Chinese exports could continue to grow at close to their 2004 pace through 2006.  But I really don’t think China will be exporting $200b a month in the middle of 2010 either.  Moving into higher-end products may help keep the growth rate up, but it also will only increase the political backlash against trade in the US and Europe.

Via Survived Sars, I came across an interesting quote from Xia Bin of China's Development Research Council.   I thought it showed an appropriate degree of realism.   Xia Bin noted that the US is not exactly noted for taking the interest of other countries into its decisions. 

The U.S. always tends to cast the interest of any other country to the winds. It has its currency revalued to fix its own economic problems. If China holds massive dollar assets, possible damages will be notable in the case of sharp depreciation of the dollar. 

W’s performance at the recent summit probably did not lead Xia Bin to change his point of view.  If I were sitting in a plush office somewhere in Beijing, I wouldn’t be counting on the US to help devise my exit strategy.  Or to take policy decisions that would preserve the value of all the funds China has lend to the US. 

I would be reading the policy recommendations in the Harvard report – recommendations developed with input from a number of folks in China, not just outside academics (including M. Blanchard and M. Giavazzi).   And I would wonder if it is now too late to change course …

China avoided a hard landing after the 2003-04 investment boom and growth acceleration.    I am not sure it will be so lucky after a similar investment boom and growth acceleration in late 2005 and the first half of 2006.  


  • Posted by Charlie

    Excellent post. Nothing has really changed. It seems like China is always on the verge of real currency adjustment, but it never really happens. I don’t think the fear of what bad could happen will be enough for things to change. I think bad things will actually have to happen before things change.

  • Posted by Stormy

    The Dooley-Landau-Garber paper is brilliant. And India waits in the wings.

    Re the Lim-Spence-Haussmann paper:

    Energy: I question that there can be a significant supply response to energy—at least quickly enough. The authors point to environmental issues being one of those constraints. I would add that oil production levels may well be another; we should certainly know by the end of this year or the next, despite all the crowing about present supplies.

    That “household disposable income (think wages) is declining as a share of Chinese GDP” supports much of what I have claimed. I would be interested to know at what point China can indeed afford to buy the goods it exports. Looks like even in China the rich get richer; the poor get poorer. But I am sure this kind of remark will elicit energetic contrarians.

    This game has disaster written all over it. We are going to ride the U.S. consumer until his back breaks–or until energy and/or the environment end the race.

  • Posted by kz

    Joseph Wang said because inflation in China is so low, people in China can save (I think he is right while, of course, there are many other factors). If the inflation rising in China starts to cause economic spiral, it can change many things.

    The truth is, rather than China affecting the world through deflationary or inflationary pressure, the case is more likely that China gets affected by the inflationary pressure rooted from the US due to RMB being pegged to the USD. So now that US inflation is high and likely to stay high for the next half a year at least, when we argue regarding China’s near future, I think taking higher inflation rate in China into consideration would be a good idea.

  • Posted by AC

    The phenomenal rise in Chinese exports began in 2001, and
    continues linearly since then, leading to the other effects,
    like the reserve growth. The two reasons for this export
    offensive are that China became WTO memeber in 2001, and that the economic response to the terror attacks in the US proved to be catastrophic — the artificial stimulation of the economy thru low interest rates which led to the increase of the mortgage equity withrawal rate, to the real estate bubble etc. No wonder, that the increase of the outer financing needs of the US mimics closely the Chinese export: growing linearly since 2001 in average.

    My question is: what if this trend continues for a few more
    years, as Brad says. China could bulid up reserves as high as
    several trillion dollars, maybe even 10 trillion. The interest
    on 10 trillion is 500 billion a year. The Chinese then could
    simply stop working hard, sit back, and enjoy their interest
    income. If the need for US debt goes down (because China does
    not buy it), the interest rates would go up even further. That
    would make the Cinese interest income even higher.

  • Posted by Stormy


    Have you checked average wages in China? Not quite sure who is going to be sitting back and retiring.


    If they can save, why is disposable income going down as a percentage of GDP? Maybe that has to be spelled out a bit. Maybe I am missing something.

  • Posted by gab

    I’m unsure where we’re getting the idea that inflation in the US is high. I realize “high” is a subjective term, and that inflation can be measured in many ways, but compared to years past, inflation today is not a big problem.

  • Posted by DOR

    The Chinese economy is clearly growing much too fast, and has been for far too long. Real GDP is up 10% a year for three years in a row due to very fast growth in the money supply, trade volumes and capital investment.

    That combination should produce a lot of inflationary pressure, but consumer prices have been rising less than 2.5% since 2003.

    There is no sign of a slowdown in first-half 2006. Urban incomes rose more than 10%, rural incomes nearly 12% and anecdotal reports say wages are rising at an even faster rate.

    Retail sales were up 13.3% in the first half, steel production 25.8%, automobile output 53.2%. Investment in heavy industry was 32.6% greater than a year ago, and 41.2% more in light industry.

    And yet, consumer prices were just 1.3% higher in January-June this year as compared to the same six months in 2005. Producer prices, the cost of inputs to that roaring production process, rose just 2.7%. Neither figure makes much sense.

    So, what can we conclude? Either THE DATA ARE ALL WRONG, or the inflationary side effects are being masked, or both.

    The latter answer seems to make the most sense: the data are indicative of over-heating, but cannot be taken at face value. Prices are rising much faster than 1.3%, but not at the double-digit levels that would trigger a consumer backlash.

    The faster the economy grows, the greater the risk that the authorities will have to resort to ever blunter policy instruments in an effort to get this rampaging dragon under control. As that happens, unexpected knock-on effects are going to produce some nasty surprises.


    * * *

    Q: “So my question to China’s leadership is simple: What is your exit strategy?”
    A: Not sure. Do we need one?

    Q: “Do you intend to add another $500b, maybe more, to your reserves over the next two years?
    A: Maybe. Some think we should buy oil, but it’s a bit pricey, don’t you think?

    Q: “Another trillion, maybe more, over the next four?”
    A: You make it sound like that’s a problem.

    Q: “Do you think that exports can continue to grow at a 25% annual clip for the next two years?”
    A: Hmm, I think you’ve hit it on the head. That’s the one that keeps us up at night.

    Q: “The next four?”
    A: See, that’s the problem. That’s why we think the dollar reserves are useful. How else are we going to keep things quiet the next time the rules of the export game are changed? You really, really don’t want us to take the lid off, do you?


  • Posted by algernon

    I have the same reaction as DOR concerning the credibility of Chinese inflation data. Money supply growing 19% the past 12 months & not a lot slower in the preceding years with GDP growing roughly half as fast. With so much GDP being exported, there should be an inordinant quantity of Yuan chasing domestic Chinese goods.

    Is there anything to the rumor that the Chinese are buying a good bit of gold?

  • Posted by DF

    Crash course …

    And Roach thought the political leaders finally had understood the challenge …

    Dor wrote
    “And yet, consumer prices were just 1.3% higher in January-June this year as compared to the same six months in 2005. Producer prices, the cost of inputs to that roaring production process, rose just 2.7%. Neither figure makes much sense.

    So, what can we conclude? Either THE DATA ARE ALL WRONG, or the inflationary side effects are being masked, or both. ”

    Nah I believe we can conclude with some confidence (and even though there must be some problems with the numbers) : there s overcapacity in China, incredible pressure from the countryside to keep wages down, incredible difficulty to find consumers abroad and at home, keeping prices down.
    Everything is set for a full fledge debt deflation mode. THe USA in the 30’s owned most of the world’s gold, it did not help them a bit to fight the debt deflation. Now china and japan hold the biggest chunk of the US dollar reserves … I doubt it will help them anyhow.

    deflation deflation deflation, it’s nearer than you think, deflation deflation deflation, listen how nice is it : when it’s still far away.
    deflation deflation deflation, gee ain’t it coming nearer ? Deflation deflation deflation,
    Mummy come to help, i hate living my worst nightmares.

  • Posted by MrBill

    Some gems pulled off Reuters this morning.

    China’s growth is up 11.3%, while their trade surplus has grown 55% in H1’06 and their FX reserves hit $941.1 bio at the end of June. So far nothing new, but then they go onto say that foreign firms that import, assemble and then re-export account for 50% of Chinese exports and 60% of China’s trade surplus. Thin margins in textiles and other assemblers of perhaps 3-4% limit China’s ability to raise the yuan and keep these jobs. Ending tax rebates for exporters may have a more noticable effect.

    But estimates of industry profits are $101.4 billion in H1’06 up 28% versus 21.3% in Q1’06 and compare to 23% in 2005 and 40% in 2004. Some complain that these reflect the profits at large state owned monoploies or protected firms and are not representative of other domestic firms, but it is the best data available.

    As for high base metal and energy import prices, Chinese firms are regaining pricing power and are able to pass along those input costs. This means those foreign firms that are importing, assembling and then re-exporting using ever higher priced energy and commodity inputs are not going to be exporting deflation for long, rather contributing to higher global inflation, at least for primary inputs. Last week we saw that China imported 16% more crude oil this year than last year and that in nominal terms energy imports outstripped growth at 11.3%. It is unrealistic to expect that China will manage to become more energy efficient while the economy, exports and foreign reserves are all growing quickly. Normally, slower growth and reduced margins would trigger the necessary impetus to try to conserve and do more with less.

    Bernanke may expect the US economy to cool, leading to lower inflation expectations, but so far external inflation is alive and well, so really we are talking about stagflation as it applies to the US situation. Headline inflation is still 4.3% with core inflation at 2.6%.

    Yesterday’s DOE inventory nos. showed that again gasoline demand was up 1.9% and distillate (diesel) demand up 4.8%! YOY. So the Chinese are using more energy, and the US is at least using more transport fuels, although total US demand is down 1.7% for manufacturing & stationary fuel use as industry switches to natural gas, coal, hydro-electric, etc.

    So it would appear that if foreign firms are still able to pass along their higher costs, and global growth remains as strong as it is, that current account imbalances will continue to grow as well, with the only demand destruction occuring in third countries who cannot compete with Chinese re-exports?

  • Posted by MrBill

    Sorry, also see estimates that 60% of fixed asset investment in China is coming from retained earnings, so the large foreign exchange reserves are not needed for local investment per se, so they will likely continue to find their way into low yielding foreign assets rather than be put to work at home, in which case, even if crude is expensive now, building-up their SPR would at least provide physical security should events in the ME spiral out of control? And a 25% jump in price to $100 a barrel is a better return than low yielding US securities or even lower yielding European ones. Or alternatively, the Chinese could cover their physical short in the copper markets (at a loss naturally). At least physical commodities would reduce their USD exposure should Uncle Sam decide to share the pain with his creditors.

  • Posted by DOR

    I had lunch with Dr Dong TAO today; he’s regional chief economist for Credit Suisse and very well regarded in HK. Some highlights:

    China’s Rmb strategy is to bore speculators to death. Mission accomplished. Monetary policy tightening, however, can only be “mission failed”. Exchange rate policy has hijacked monetary policy, and that will continue for the foreseeable future.

    Interest rates +57bps by year-end, +100bps over the next 12 months (to mid-07).

    Rmb14 trillion in savings deposit. Rmb 1 trillion in stock market, Rmb 3 trillion in non-traded stocks.

    Bank deposit interest minus inflation minus interest rate tax = zero. Real estate returns are 4-6% p.a. Conclusion: real estate prices will continue climbing, sharply.

    CPI will rise to 2-2.5% in the second half of this year, but the basket is so food-heavy (25%) that it won’t reflect actual price changes. Medical component is pill prices, not service fees. Education component is books, not tuition. Current inflation is really 6-8% a year.

    Wages for lower end manufacturing workers (migrants) are shooting up in the coastal regions, particularly the PRD. Total China earnings for a US$19.95 US retail price Barbie Doll is US$0.50.

    2006 Trade balance $131 billion, current-account $202.1 billion.

    2007 Trade balance $110.7 billion, current-account $177.5 billion.

    Larger current-account surplus / GDP over the next five years, but less trade dependent.

    Out there: Rmb5:US$1 sometime around 2012-15, and HK$7.75:US$1 won’t change.

    * * *

    Having very recently lived through several years of deflation . . . it isn’t pretty.

    * * *

    The 50% figure on foreign investment in China’s exports is about five years out of date (more likely a lazy journalist). 58% in 2005, and the same for share of imports.

    Consider the retained earnings as investment for fixed assets in light of my comment above about ROI on savings deposits. Reinvestment is the fiduciary responsibility of management in these circumstances. Not that I approve, but that’s life.

  • Posted by Guest

    re: feeding the dragon

    “The government had been petitioned to curb the export of unbeneficiated chromite ore from South Africa, Xstrata Alloys MD Chrome Deon Dreyer said on Tuesday… He said that China was importing the raw chromite ore from South Africa, Turkey and India and using it to itself produce ferrochrome. While this was happening, South Africa was using only 77 % of its available converting capacity…”

    “…The WFP began providing food aid to China in 1979, meeting the immediate food needs of more than 30 million poor Chinese and helping build infrastructure in their communities through programs exchanging food for work and training. It made its final food donation to China in April 2005, a move that heralded the country’s gradual emergence from decades of dire poverty and hunger. Incomes and living conditions in much of China, however, remain far behind those of the wealthy coastal cities. The leadership has promised to spend heavily on easing politically volatile poverty in the countryside, where nearly two-thirds of the country’s 1.3 billion people live. The WFP’s report said sub-Saharan Africa for the first time received more than half of all the food aid…”,,-5963128,00.html

    Although still have to wonder about conditions in rural China, assuming there has to be some truth to these reports:

    “Only a few years ago, Chen Guangcheng, a blind man who taught himself the law, was hailed as a champion of peasant rights who symbolized China’s growing embrace of legal norms… Mr. Chen, 35, is now a symbol of something else: the tendency of Communist Party officials to use legal pretexts to crush dissent…”

  • Posted by Guest

    “THE channelling of pension savings into private equity and infrastructure funds has only just begun, but it seems clear that it is the start of a profound revolution in the way capital is allocated and corporations controlled. As a result, many people are now turning their minds to the implications of it all… Infrastructure and private equity are both manifestations of “alternative” investment allocations by super funds and they share one common characteristic: high levels of debt. As discussed here before, to that extent it’s a re-run of the 1980s, when the availability of debt spawned opportunists willing to spend it on Napoleonic endeavours. But this time there is a big difference: temporary ownership, rather than empire. For private equity this means The Exit. All deals are predicated on selling for a profit in three to five years… For infrastructure, that means selling to public investors immediately…”

  • Posted by kz

    Capacity Utilization at 82.4% is the highest in the last 6 years.
    PPI yoy is 4.9%, pretty high.
    CPI excluding food and energy MoM is .3% four months in a row for the first time in 6 years.
    CPI yoy is 4.3, the highest in the last 6 years except September 2005 immediately after Hurricane Katrina.
    CPI Index NSA is at 202.9, the highest in 6 years.
    There are other indicators that show high inflation in the US. There are plenty of factors to believe inflation in the US will remain for at least half a year.
    Tell me how how inflation in the US is not high.

  • Posted by MrBill

    “BEIJING, July 20 (Xinhua) — China produced 91.664 million tons of crude oil in the first 6 months of the year, a rise of 2.1 percent on the corresponding period last year, said sources with the China Petroleum and Chemical Industry Association (CPCIA) Thursday.

    Output of refined oil products was 84.822 million tons, up 5.6 percent year on year, the CPCIA told Xinhua.

    According to the statistics of the General Administration of Customs, China’s net imports of crude oil was 70.33 million tons in the first six months, up 17.6 percent year on year and that of refined oil products, 12.03 million tons with a growth of 48.3 percent.

    The apparent consumption of crude oil, representing the sum of net imports and output, is 161.994 million tons, 8.2 percent up on the same period last year, and that of refined oil products, 96.852 million tons, up 19.2 percent.

    Both the output and apparent consumption of crude oil and refined oil products hit a record high in the first six months.”

  • Posted by MrBil

    “…The WFP began providing food aid to China in 1979, meeting the immediate food needs of more than 30 million poor Chinese and helping build infrastructure in their communities through programs exchanging food for work and training. It made its final food donation to China in April 2005, a move that heralded the country’s gradual emergence from decades of dire poverty and hunger.”

    Ironically, due to food aid to the Hermit Kingdom, China is now the WPF’s 3rd largest donor…
    “In the same year it stopped receiving food aid from WFP, China emerged as the world’s third largest food aid donor in 2005, according to the latest annual Food Aid Monitor from INTERFAIS, the International Food Aid Information System. ”

    Things are changing so quickly that I need a race card to keep track?

  • Posted by Guest

    re: “Tell me how inflation in the US is not high.”

    Perhaps comes down to questions about what is measured, as DOR points out, the scale of regional differences and the vulnerability of inflation drivers to different rebalancing scenarios?

    Beyond London and Britain, this would have to have some truth in the US, China…

    “…Economic divisions used to be characterised by unemployment and economic decline but are now characterised by the difference in house prices…”,,1823045,00.html

  • Posted by bsetser

    very nice discussion.

    Re: ” Wages for lower end manufacturing workers (migrants) are shooting up in the coastal regions, particularly the PRD. Total China earnings for a US$19.95 US retail price Barbie Doll is US$0.50.”

    Isn’t that the result of a Chinese policy choice to sell its assembly services artificially cheap?

  • Posted by bsetser

    p.s. on the export side, is there any evidence of rising prices? Don’t think much, tho i should look at the data. productivity is also growing rapidly, and the data suggests that household (labour) income fell as a share of GDP for several years, so it wouldn’t be a bad thing for wages to rise a bit, in line with productivity growth or even above (making up for some lost ground), even if some whine. Same is true with real exchange appreciation — maybe China shouldn’t be taking market share from Bangladesh and African textile producers now that is producing a much broader range of products, including auto parts/ cars for export.

  • Posted by bsetser

    DOR — should chinese banks ever have to pay Chinese savers a real return on deposits, I would think domestic sterilization bills would need to be a bit higher than they are now. And if in four years China has $2 trillion in fx reserves earning 4% in $ (guess), offset by $500b in RMB cash and $1.5 trillion in sterilization bills, I can see more than a few risks … particularly if the RMB is gonna be at 5 in 2010 +. The PBoC’s balance sheet doesn’t look so good then.

  • Posted by MrBill

    “Isn’t ‘food aid’ a form of export subsidy? Reading that entire article, a bit odd the Latin America is a recipient of food aid given the quantity of Latin American food products that are sold in North American – and Chinese? – food markets.”

    Food aid is most definately an export subsidy. Spoke to a guy here in Cyprus who used to work for BAT for many, many years in EEMEA. Apparently, some aid given to Egypt was in the form of high quality Virginia tobacco, which curiously enough was not consumed in Egypt, but then re-sold as an export to other EEMEA countries. It shows up as aid on one hand and as exports on the other side. But it is really just an export subsidy to tobacco farmers in the USA.

  • Posted by isaac

    I wonder how much China growth is really accelerating over 2004, how much is purely NBS gave up habitual distortion & smoothing of the number. Based on expenditure side, Chinese GDP probabaly never slower than 11% in most quarters from 2004 to 2006.

    How much is the acceleration real? how much purely NBS cram quarters of underreporting into one off figure??

    it is weird that PBOC remain calm over such number, the overheating probabaly is less than headline looked.. Some leading indicator such as steel price/auto sales/ credit number already peaked in June??

  • Posted by bsetser

    i would hope that auto sales slowed a bit in the leading indicators …

    Anderson (of UBS) says the accleration is real, but not as strong as the 03-04 acceleration based on his proprietary indicators, and that the economy should slow a bit.

    Agree tho that China has been growing very strong for some time — probably stronger than showed up in the data.

  • Posted by Guest

    Isn’t the concern more to do with breadth, depth and sustainability (quality?) of the growth – how many are benefiting at the expense of what and whom and for how long? Also looking at issues like: “Nearly half of China’s chemical plants pose “a severe environmental risk”, according to a report released yesterday…”,,1818393,00.html

    re: Chinese auto parts:

    CYD (autoparts) has been one of this week’s top decliners on the NYSE, now down substantially from its one-year and all time high, if this is any sort of indicator.

  • Posted by Guest

    Thinking about triggers, correlations, oil and the vast differences between the creditor and petro currency economies, also noticed: “Arab stock regulators are gathering in London today to find ways to revive their markets as a week of violence in Israel and Lebanon sends prices tumbling. Some officials opted to skip the conference as conflict between Israel and Hezbollah intensified, prompting Beirut’s market to close. Those who do attend will discuss initiatives such as permitting share purchases with borrowed money and giving foreign investors more leeway to buy. “Financial regulators need to speed up reform in Arab markets…”

  • Posted by Gcs

    brad great post

    tough scene

    the dragon taking
    25% export kick ups
    these days
    ends by
    a mighty deep boot
    into our industrial belly


    mr billup to your old tricks i see

    like a fire-house horse and smoke

    u seem crazed by the mere
    sent of distant inflation…

    u be caught up
    in innocent
    side line crankiness

    ” these spendthrifts these reckless silly spendthrifts ….”

    those — i hope not u–
    really really
    into “real” personal portfolio growth uber alles
    usually gain thru fraudulent inflation mongering

    as a prudent aunt bess
    cover for croaking
    litttle guy wages

    hey and why not

    thats the game
    by any means maximizing

    whats a bit new
    these days
    this antique cry
    of impending
    runaway inflation
    it keeps coming
    even as
    the trans nats and the cbs
    make continued price levelation
    if not out right deflation
    the only real happening

    its the distraction of it all
    that feels so good to em i suspect

    conjuring naughty scenes
    wild household and gubmint
    and for what ???

    trinket consumption

    ahhhh well
    the beginning stepisn’t it

    next its
    sex drugs and derivatives

    and what do they all have in common

    at bottom
    they’re all one of a kind

    they’re all
    price level ponces

    if a mad scientist
    doing fadish experimental economics
    forced me
    i’d play df’s price squeeze hand

    if not absolutely
    at least relative to global real growth optimo
    i’d bet
    the worlds team of price level setters
    are into
    a doldrum-ous deflatio tilt
    not a hair on end inflation gig

    why no good ???

    to quote the late fedskin in chief

    little green satin

    “better we create inflation…
    we know how to handle inflation …”

  • Posted by psh

    he is the ee cummings of creative destruction

  • Posted by isaac

    Brad, another issue why PBOC not rush for more tightening:

    Chiense property market is withering under intensified government policy in last 3 months( downpayment raised from 20% to 30%, 1 rate hike, transaction tax of 5.53%, restriction on foreign purchase),

    government basically squeeze out property speculator, investors and dampen short-squeezed sentiment of real homebuyer. Just like bubble in shanghai, financial type accounted for nearly 20-30% of market in 2004-2005 bubble.

    sales of new and pre-owned residential property dropped by 20-30% since June, though price not yet tanked, but risk of major property market correction is real

    As for auto, things will turn fast, if Chinese governmnet have the gut to deregulate gasline/disel price which are still 20% below mkt, it will take out roughly US$15b implicit fiscal subisidy to auto/transport sector.

    Therefore, PBOC might not be the only one to feel the heat for the run-away growth.

  • Posted by MrBill

    GCS Wrote: “to quote the late fedskin in chief

    little green satin

    “better we create inflation…
    we know how to handle inflation …””

    Alan & Ben you’re probably right
    On inflation I am likely too uptight,
    but its not costs & wages per se
    it’s unbridled asset price rises you see

    when a speculative dot.con bubble burst
    working off excesses was feared the worst
    cranked up money supply flooding bourses
    whoosh go emerging markets and houses

    unfunded liabilities continue to grow
    global imblances widen, likely to blow
    the gains from free trade and growth
    as policy makers try to have more of both

    sustainable development a quaint idea
    faster growth becomes our culpa mea
    the funds borrowed from creditor nations
    the difference paid by unborn generations

    in the dismal science it is a basic tenant
    although man may have unlimited want
    the laws of supply & demand dictate
    that the resources he needs are finite

    where will it end as peak oil looms
    a smooth transition or are we doomed?
    competition and resource wars lost or won
    with no rules and the end game has begun

    when borrowing from Peter to pay Paul
    taking money from the same pocket is all
    the people eat from the same rice bowl
    supported from a planet increasingly full

    inflation may matter diddly squat
    what you produce is that what you got
    measure it in dollars or yuan if you want
    but the current account will come back to haunt

  • Posted by MrBill

    inflation may NOT matter diddly squat
    what you produce is that what you got
    measure it in dollars or yuan if you want
    but the current account will come back to haunt

  • Posted by DOR

    the same way that US _DATA_ can tell us something useful about the US economy.

  • Posted by DF

    Does anyone know of numbers (even unreliable ones 🙂 on capacity utilisation in CHina. My bet is that there are massive and growing overcapacities in all areas. Just as prices are only flattening in US housing while the inventory is piling up, bankrupcies soaring etc, we’re not seeing yet significiant price declines in China, but it’s coming up, and I bet we’ll see a recession in China pretty soon possibly in 2008, or even before.

    If history is to repeat itself, the economic crisis will start in Asia, not in the USA, we’ll have chinese companies going bankrupt etc.

  • Posted by Gcs

    mr bill you are kool
    mentholated koool

    indeed asset markets are left to their torrid devices

    “the difference paid by unborn generations ”

    to be precise paid by working and taxable parts
    of unborn generations
    to owner parts of the same maybe foreign unborn generation

    u say it all with this

    “what you produce is that what you got”

    produce it
    eat it or trade it
    or if you want
    and can store it

    saving paper don’t mean one thing got stored
    or a productivity enhancing machine got built

    as to the got it
    mr bill

    as your first point implies
    even when you produce it
    it might be got away from you

    by somebody who’
    s “owed it”
    pax daddy

  • Posted by bsetser

    DOR — aren’t there rather direct links between the PBoC’s balance sheet and a lot of the banking crisis risks that the PBoC worries about?

  • Posted by gab

    If inflation were truly “high,” long bond rates would not be at 5.09%. TIP’s breakevens would not be at 2 1/2%. The entire Treasury curve would not be trading through Fed Funds. You can quote any Gov’t statistic you’d like, but market-based indicators are telling us that inflation is not a problem.

  • Posted by isaac

    “another issue why PBOC not rush for more tightening”, stand corrected, too much second guessing Chinese bureaucrats is futile, Zhou xiao chuan is not that complex or have more clearer crsytal ball, the bureacratic process to push through tightening might simply take too long.

    turns out PBOC do rush for more tightening, not only they tighten, but they find 27bp rate hike as too limited and opted for blunt reserve requirement again within 2 months… 50bp hike in reserve requirement could drain Rmb150b base money instantly, put firm brake on money supply for next 2 or 3 quaters.

    it seem quantitative measures are more convenient and direct for addresing PBOC immediate concern- surging money supply/ credit, though with a rigid FX regime and US$20-30b FX internvention per months, quantitative tightening effect will wane… it only take a few quarters before liquidity excess returned?? so will PBOC move again its reserve requirement or more sterilzation bill? what a vituous cycle?

    Interest rate hike, though gradual and mild, if executed in series, could send tightening siganl and might have more lasting effect on doemstic overheating? but apparently Chinese obsession with Rmb paralyze Interest rate as feasible tools( YU YONG DING told me 3% Rmb-USD negative carry necessary to fail hot money speculation, very dubious logic, how many hot money park in deposit???)

  • Posted by HK

    Brad–Everyone is hipnotised by the spectacular Chinese economic development, though he/she feels that at some stage it will fail in a spectacular way. I am sure that the failure would be related to the gross currency undervaluation/huge accumulation of foreign exchange reserves/loss of monetary controls/asset price bubble and overinvestment/large non-performing loans/—. If only anyone can clearly and convinsingly show the way and the timing the crisis will come in China.

  • Posted by MrBill

    “If only anyone can clearly and convinsingly show the way and the timing the crisis will come in China.”

    A loss of confidence in the US dollar due to its large current account imbalance would change a lot of business plans and turn conventional wisdom on its head….

  • Posted by Guest


    I am still waiting for your reasoning to translate into an accurate forecast. You are critical but offer no material insight into the market. I would encourage you to focus more on facts rather than try to tell a story. Data today exists in such quantitites that using a few facts yields no understanding. You need to build an explaination that uses large quantities of data. I would encourage you to think more in modeling terms and less like a post modern art critic.