China’s official battle against rising asset prices, ‘hot money’ supply shortages and overall, consumer price inflation, continue to dominate the media and government pronouncements.
Since the release of the surprise inflation figures for October earlier this month, it seems hardly a day has gone by without some official statement from either the country’s central bank, banking regulator, Ministry of Commerce, State Council or the National Development and Reform Commission.
In other words, official China is very, very concerned at the risks to Communist party rule should inflation not start easing, especially in the very cold winter now on its way. No one wants the economy to have a hard landing, but it’s looking a distinct possibility.
For a country that has grown so rapidly the inflation risk is always there, but what is very intriguing is the growing list of products said to be in short supply, from cooking oil, to corn, garlic and diesel, not to mention coal.
It sounds very much like there’s a massive breakdown in the official and unofficial supply chains in China.
The situation now seems more serious than in 2008 when there were numerous protests at rising prices, especially for food.
When subsidies, sales from official reserves, dropping of tolls and price cuts are ordered by the central government, you know the situation is very serious.
And again, this is important in faraway Australia for the obvious reasons of our strong economic linkages.
But it all raises the question, why only one interest rate rise which still left bank deposit rates negative when compared to returns elsewhere (and why money is flowing out of banks and into property and even hoarding grain and oil)? And why not allow the Yuan to move a bit more quickly (or is the government afraid of giving speculators easy profits on the hundreds of billions of Yuan they have brought into China since mid year when the currency was allowed to start moving).
The latest statement came Wednesday from the People’s Bank of China which again restated (for the second time in a month) the authorities will strengthen liquidity management and “normalize” monetary conditions.
That’s after the rate rise in October and the two increases in bank asset reserve ratios ordered this month.
Hu Xiaolin, a deputy governor of the bank said China will also control the pace of bank lending for the remainder of this year as it will be difficult to stay within the government’s 7.5 trillion Yuan ($1.13 billion) target for new loans in 2010. That means there will be a sharp contraction lending in the next five weeks.
The 21st Century Business Herald reported on Tuesday that China’s banks had already extended 600 billion Yuan of loans this month.
That would put China’s total loans at the government’s annual target of 7.5 trillion Yuan in new lending by the end of November, which is next Tuesday.
Yesterday there was speculation on the official Xinhua website, that the loan target would be cut to closer to 7 trillion Yuan for next year as part of the fight against inflation and rising asset prices.
These controls do not cover the underground financial system (known as "Underground Bank").
Interestingly a statement this week from the police it said that 500 such banks had been shut down in the last eight years with total assets of $US30 billion. It was the first official recognition of the pace of closures of these groups.
Inflation hit an annual 4.4% in the year to October, up 0.7% from September.
The government has acknowledged, through an economic forecasting group, that inflation could hit an annual 3.8% by the end of this year, higher than the official target of 3%, and continue around this high level for several months into 2011.
There were media reports this week that the government could lift the 2011 inflation target closer to 4%.
If it does, it’s an admission that inflation won’t fall for a while. But better to acknowledge that reality than try and fudge it with an unrealistically low target.
It all depends on the cost of food and energy, which have emerged as real sticking points in terms of supply, hoarding and speculation and pricing. Food costs jumped 10.1% in October and while some of that was due to poor weather, much is due to poor logistics, short supplies, hoarding and misallocation.
In the central bank statement, Hu was quoted as saying rising wages, higher commodities prices and abundant liquidity are adding to inflation expectations. Inflation pressure in China is also rising as the country attracts capital inflows because of increasing expectations for Yuan appreciation, she said.
Earlier this week, China’s Banking Regulatory Commission (CBRC) has called on banks to urgently offer special support to the agriculture sector in the face of severe shortages of corn, cotton and sugar, among other crops.
Local media reports said the comments were the first official admission that the country faces corn shortages, following repeated assurances from the government grain authority that the country has ample reserves.
Special financial support should be offered to those involved in production, processing and circulation of some farm products to counteract looming shortages for short-grain rice,
