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QE2 - Inflation and how China vs Brazil vs India deals with it

longbow

Alfrescian
Loyal
Fed's QE2 has resulted in inflation in many of the Asia economies. Here is how 3 of the BRIC nations are dealing with it. The Chinese Central appear to be very active in combating inflation.


Taming inflation in China, Brazil, and India
January 5, 2011 11:47 am

The Fed's quantitative easing will likely lead to rising inflation in these three important countries. With food prices already skyrocketing, how well will their central bankers tame the beast?

by Darius Dale, Hedgeye


Chairman Bernanke's experiment with quantitative easing continues to have unintended consequences for the global economy, due to the impact of the equation highlighted below:

QE2 = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

A brief review of global economic data points highlights struggles with inflation in three very key countries: China, India and Brazil. While the divergence between each country's response reminds us that both inflation and monetary policy are local, analyzing them collectively allows us to derive the equation laid out above.

Let's briefly visit each country's headlines and data points from today's global macro run for a quick update on the global inflation front.

Country: China


Policy Stance: Proactive

On a relative basis, China has been particularly proactive in its fight with inflation of late, hiking interest rates twice in the last 2.5 months, raising banks' reserve requirements, and announcing potential price controls and supply rationing in its food market. China has proactively fought speculation and its latest Purchasing Managers' Index (PMI) report shows early signs of success.

Manufacturing PMI, a proxy for demand, slowed in December to 53.9 vs. 55.2 prior with the Input Prices component backing off a 29-month high, coming in at 66.7 vs. 73.5 in November. Dampening some of the positive headway made in the report was an acceleration in Non-Manufacturing PMI to 56.5 vs. 53.2 prior, which suggests Chinese monetary policy has more tightening to do before growth has slowed enough to rein in both inflation and inflation expectations.


We continue to have conviction that growth is slowing and inflation will remain a headwind in China over the intermediate term, necessitating more tightening measures which are likely to have an incremental drag on Chinese (and therefore global) GDP growth. Chinese Central Bank Governor Zhou Xiaochuan agrees, pledging last week to shift Chinese monetary policy to a "prudent" stance in order to tackle inflation in the New Year.

Country: Brazil


Policy Stance: Reactive

Last fall, Brazil's monetary policy graded out less than favorably due to its relatively late reaction (compared to China) in fighting inflation. But it appears Brazil is finally ready to shift the fight into high gear in January, after raising reserve requirements early last month. Analysis of Brazilian interest rate swaps suggests traders are betting incoming Central Bank President Alexandre Tombini will hike the benchmark Selic rate by 50bps to 11.25% in his first meeting as chief on January 18-19.

New President Dilma Rousseff, who only recently brought about widespread concern in the Brazilian bond market because of the perception that she would fail to contain inflation, is joining in on the fight, pledging to cut government spending by $15 billion – a sum that exceeded investor expectations. Last weekend, she also pledged to tackle the "plague" of inflation:

"To ensure the continuation of the current economic growth cycle we need to ensure stability, especially price stability… We won't allow under any hypothesis that this plague returns to eat away our economic tissue and hurt the poorest families."

The hope is that she's willing to back her rhetoric with prudent policy action, and to some extent, she's shown signs of this. On the flip side, however, we see that the Brazilian Congress just approved an increase in the minimum salary – a metric that determines both the nation's minimum wage and transfer payments. For reference, the last adjustment to the Bolsa Familia program was a 10% increase in 2009.

Given that a broad-based wage hike would augment already-robust Brazilian consumer demand, we would expect to see more monetary policy tightening and offsetting fiscal restraint elsewhere in the government's budget over the intermediate term.

Elsewhere on the demand front, we see Brazil's Manufacturing PMI came in at 52.4 for December, a 2.5 increase over November's 49.9 reading. Brazil is in a setup very similar to China: while we have conviction that growth will continue to slow throughout the first half of 2011, it is robust enough to continue providing demand-side inflationary pressures.


Brazil's CPI (as measured by the unofficial FGV IGP-M Index) accelerated in December to grow by 11.32% year-over-year, driven by higher food prices that are now consuming one-third of poor Brazilian's incomes. By comparison, the Benchmark ICPA Index accelerated to a 21-month high in November, coming in at +5.63% YoY.

Country: India


Policy Stance: Inactive

India continues to lag in its bout with taming inflation, opting instead for the "wait and see" approach with regard to implementing another round(s) of tightening. Having shifted from his hawkish stance (six rate hikes in 2010) to a more relaxed position, Reserve Bank of India Governor Duvvuri Subarrao has held true to his November promise that additional rate hikes are not in India's near-term future.

That would be fine if India had inflation under control. Unfortunately, the latest wholesale price index (WPI) reading of +7.5% year-over-year suggests India is far from achieving its target of +4-4.5% inflation. It is, however, a marginal improvement nonetheless, though expecting an additional +300bps drop from here absent any further tightening would be reckless at best. Moreover, food inflation continues to plague the 828 million Indians who live on less than $2 per day, with the PPP accelerating to +14.44% year-over-year in the second week of December.

Compounding this blatant lack of vigilance is the RBI's decision to add fuel to the fire by buying back government bonds from Indian lenders with the intention of increasing liquidity in a cash-strapped banking system that has been struggling to meet demand for loans. In December, the RBI pumped nearly 414 billion rupees ($9.3B) into India's financial system via sovereign bond purchases (a.k.a. Quantitative Easing).

Fueling speculation when inflation is running at nearly twice the target rate is not our idea of prudent monetary policy. We expect further tightening ahead, but only after inflation becomes the problem it was in the first half of 2010. For this reason, we continue to remain bearish on Indian equities over the intermediate-term trend. We are, however, bullish on many commodities (corn, sugar, oil, etc.) as countries like China and India look to accelerate food and energy imports to ease any supply shortages that are perpetuating rising prices in their economies.
 

GoldenDragon

Alfrescian (Inf)
Asset
If they need bestest advice, they can always pay for the services of our MIW and bestest civil service on planet earth.
 

Dreamer1

Alfrescian
Loyal
Fed's QE2 has resulted in inflation in many of the Asia economies. Here is how 3 of the BRIC nations are dealing with it. The Chinese Central appear to be very active in combating inflation.


Taming inflation in China, Brazil, and India
January 5, 2011 11:47 am

The Fed's quantitative easing will likely lead to rising inflation in these three important countries. With food prices already skyrocketing, how well will their central bankers tame the beast?

by Darius Dale, Hedgeye


Chairman Bernanke's experiment with quantitative easing continues to have unintended consequences for the global economy, due to the impact of the equation highlighted below:

QE2 = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

A brief review of global economic data points highlights struggles with inflation in three very key countries: China, India and Brazil. While the divergence between each country's response reminds us that both inflation and monetary policy are local, analyzing them collectively allows us to derive the equation laid out above.

Let's briefly visit each country's headlines and data points from today's global macro run for a quick update on the global inflation front.

Country: China


Policy Stance: Proactive

On a relative basis, China has been particularly proactive in its fight with inflation of late, hiking interest rates twice in the last 2.5 months, raising banks' reserve requirements, and announcing potential price controls and supply rationing in its food market. China has proactively fought speculation and its latest Purchasing Managers' Index (PMI) report shows early signs of success.

Manufacturing PMI, a proxy for demand, slowed in December to 53.9 vs. 55.2 prior with the Input Prices component backing off a 29-month high, coming in at 66.7 vs. 73.5 in November. Dampening some of the positive headway made in the report was an acceleration in Non-Manufacturing PMI to 56.5 vs. 53.2 prior, which suggests Chinese monetary policy has more tightening to do before growth has slowed enough to rein in both inflation and inflation expectations.


We continue to have conviction that growth is slowing and inflation will remain a headwind in China over the intermediate term, necessitating more tightening measures which are likely to have an incremental drag on Chinese (and therefore global) GDP growth. Chinese Central Bank Governor Zhou Xiaochuan agrees, pledging last week to shift Chinese monetary policy to a "prudent" stance in order to tackle inflation in the New Year.

Country: Brazil


Policy Stance: Reactive

Last fall, Brazil's monetary policy graded out less than favorably due to its relatively late reaction (compared to China) in fighting inflation. But it appears Brazil is finally ready to shift the fight into high gear in January, after raising reserve requirements early last month. Analysis of Brazilian interest rate swaps suggests traders are betting incoming Central Bank President Alexandre Tombini will hike the benchmark Selic rate by 50bps to 11.25% in his first meeting as chief on January 18-19.

New President Dilma Rousseff, who only recently brought about widespread concern in the Brazilian bond market because of the perception that she would fail to contain inflation, is joining in on the fight, pledging to cut government spending by $15 billion – a sum that exceeded investor expectations. Last weekend, she also pledged to tackle the "plague" of inflation:

"To ensure the continuation of the current economic growth cycle we need to ensure stability, especially price stability… We won't allow under any hypothesis that this plague returns to eat away our economic tissue and hurt the poorest families."

The hope is that she's willing to back her rhetoric with prudent policy action, and to some extent, she's shown signs of this. On the flip side, however, we see that the Brazilian Congress just approved an increase in the minimum salary – a metric that determines both the nation's minimum wage and transfer payments. For reference, the last adjustment to the Bolsa Familia program was a 10% increase in 2009.

Given that a broad-based wage hike would augment already-robust Brazilian consumer demand, we would expect to see more monetary policy tightening and offsetting fiscal restraint elsewhere in the government's budget over the intermediate term.

Elsewhere on the demand front, we see Brazil's Manufacturing PMI came in at 52.4 for December, a 2.5 increase over November's 49.9 reading. Brazil is in a setup very similar to China: while we have conviction that growth will continue to slow throughout the first half of 2011, it is robust enough to continue providing demand-side inflationary pressures.


Brazil's CPI (as measured by the unofficial FGV IGP-M Index) accelerated in December to grow by 11.32% year-over-year, driven by higher food prices that are now consuming one-third of poor Brazilian's incomes. By comparison, the Benchmark ICPA Index accelerated to a 21-month high in November, coming in at +5.63% YoY.

Country: India


Policy Stance: Inactive

India continues to lag in its bout with taming inflation, opting instead for the "wait and see" approach with regard to implementing another round(s) of tightening. Having shifted from his hawkish stance (six rate hikes in 2010) to a more relaxed position, Reserve Bank of India Governor Duvvuri Subarrao has held true to his November promise that additional rate hikes are not in India's near-term future.

That would be fine if India had inflation under control. Unfortunately, the latest wholesale price index (WPI) reading of +7.5% year-over-year suggests India is far from achieving its target of +4-4.5% inflation. It is, however, a marginal improvement nonetheless, though expecting an additional +300bps drop from here absent any further tightening would be reckless at best. Moreover, food inflation continues to plague the 828 million Indians who live on less than $2 per day, with the PPP accelerating to +14.44% year-over-year in the second week of December.

Compounding this blatant lack of vigilance is the RBI's decision to add fuel to the fire by buying back government bonds from Indian lenders with the intention of increasing liquidity in a cash-strapped banking system that has been struggling to meet demand for loans. In December, the RBI pumped nearly 414 billion rupees ($9.3B) into India's financial system via sovereign bond purchases (a.k.a. Quantitative Easing).

Fueling speculation when inflation is running at nearly twice the target rate is not our idea of prudent monetary policy. We expect further tightening ahead, but only after inflation becomes the problem it was in the first half of 2010. For this reason, we continue to remain bearish on Indian equities over the intermediate-term trend. We are, however, bullish on many commodities (corn, sugar, oil, etc.) as countries like China and India look to accelerate food and energy imports to ease any supply shortages that are perpetuating rising prices in their economies.
In China,to tackle inflation,the sloution is to raise interest rate.

The growth of the economy is dependent on cheap loans provided to SOES and various provincial governmen.

China GDP will drop quite drastically this year
 

longbow

Alfrescian
Loyal
In China,to tackle inflation,the sloution is to raise interest rate.

The growth of the economy is dependent on cheap loans provided to SOES and various provincial governmen.

China GDP will drop quite drastically this year

I think even with tightening, reducing liquidity (higher bank reserves) Chinese economy will still grow at a faster clip than India. I see no drastic drop. Large % of growth in GDP is export related. In 2009 $1.2T in exports alone. The entire GDP of India is only $1.4T!!

Consumer consumption is also huge with close to 18M cars sold (larger than USA).


And Chinese are at the low end of export chain - and their products are daily necessity type items. They are reluctant on raising interest rate because that might reduce competitivness of that huge export machiney that they have.

From the article I posted, you can see beijing being very proactive in their policies. They seem to know what they are doing and that lends confidence to the market.

They have been increasing min wages (combat against imported food/commodities inflation), subsidize prices for key food items.

Agree that they probably need to raise the Yuan (higher int rates) but only after they have exhausted all other avenues. Their advantage is that they have a lot of $$ to fight inflation. For example, food price subsidies in India, will pile on even greater gov debt however the Chinese are better placed to mitigate price increases; gov has more $ and individual citizens are richer then their Indian neighbors.Here

Here is Jan 7 article on India pleading with pakistan to export more onions. A few years ago there was widespread riots in India over onion prices so this is no joke.

India on Friday urged Pakistan to allow onion exports after its regional rival cut off trade in the vegetable by land because of soaring prices at home.

The cost of the humble onion, which provides the pungent foundation for thousands of different curries and dishes on the subcontinent, has shot up in both countries, leaving their governments grappling for solutions.

Onion prices have more than doubled in Pakistan after worse-than-normal harvest, with hundreds of trucks now stuck at the border with India after the abrupt order from the commerce ministry to stop exports by road and rail.

Exports by air and sea are still permissible, however.

Reacting to the move on Friday, Indian Foreign Minister S.M. Krishna said New Delhi was attempting to reverse the Pakistani decision.

"We are in touch with Pakistan and we are hopeful that we will find a solution to this (ban) and which will ease the problem," Krishna told reporters.

Relations between India and Pakistan, which have fought three wars since independence in 1947, are riven by mistrust while efforts to get their slow-moving peace process back on track have stalled in recent months.

The ban will do little to improve relations, and will almost inevitably be seen by some in India as a deliberate ploy to increase the hardship of consumers who are battling a 20-percent rise in food prices over 12 months.

Some vegetable traders in northern India said they had stopped their exports to Pakistan as retaliation.

"We took this decision because when we needed vegetables (onion), Pakistan has simply banned the export of essential items," Amritsar-based vegetable trader Anil Mehra told the Press Trust of India.

The news agency quoted a customs official in India as saying no trucks carrying vegetables had passed over the border.

The Pakistani clampdown is aimed at preventing traders from trucking produce to India, where customs duties on onions were eliminated last month and the prices are higher. India has also banned exports.

Onion prices in India reached 80-85 Indian rupees ($1.75-$1.87) last month and are currently around 70 rupees a kilo, way above the "normal" retail price of 20-25 rupees.

Prices in Islamabad, where food items are generally more expensive than elsewhere, have risen from 40 Pakistani rupees last month to up to 90 rupees a kilo ($0.47 to $1.05).

The price rises on both sides of the border were caused by unseasonal monsoon rains which hit the crop, with the Pakistani shortage exacerbated by the exports to India.

"The exports (to India) triggered a shortage of onions in our domestic market," a Pakistani commerce ministry spokesman told AFP.

New Delhi is keen to be seen to be doing everything within its power to control the price of the staple, aware of the influence of onion prices on public opinion.

In one instance in 1998, a six-fold surge in the cost of onions was held partly responsible for the electoral defeat of the ruling Delhi state government.
Chaudhry Mohammad Ejaz, president of the Lahore vegetable market in Pakistan, said 400 trucks laden with onions were parked at the Indian border.

"It was a sudden and abrupt action (to end trade). The government should at least have given us a few days notice before issuing the order," he said.

Exporters "may suffer losses worth millions of rupees if the orders are cancelled or the goods are decayed. The authorities should let this consignment leave," he added.

A dearth of coconuts in Sri Lanka, which are an integral part of most people's diet on the island, and the soaring price of cooking oil in Bangladesh also pose a serious challenge to governments in the region.

On Thursday, India's commerce ministry said food inflation over 12 months had jumped for the fifth straight week, to 18.32 percent for the week ending December 25.

Onion prices soared about 23 percent over the week, while the cost of fruit, eggs and meat also increased.
 
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Dreamer1

Alfrescian
Loyal
I think even with tightening, reducing liquidity (higher bank reserves) Chinese economy will still grow at a faster clip than India. I see no drastic drop. Large % of growth in GDP is export related. In 2009 $1.2T in exports alone. The entire GDP of India is only $1.4T!!

Consumer consumption is also huge with close to 18M cars sold (larger than USA).


And Chinese are at the low end of export chain - and their products are daily necessity type items. They are reluctant on raising interest rate because that might reduce competitivness of that huge export machiney that they have.

From the article I posted, you can see beijing being very proactive in their policies. They seem to know what they are doing and that lends confidence to the market.

They have been increasing min wages (combat against imported food/commodities inflation), subsidize prices for key food items.

Agree that they probably need to raise the Yuan (higher int rates) but only after they have exhausted all other avenues. Their advantage is that they have a lot of $$ to fight inflation. For example, food price subsidies in India, will pile on even greater gov debt however the Chinese are better placed to mitigate price increases; gov has more $ and individual citizens are richer then their Indian neighbors.Here

(1)China vs India,my bet is on India for this year,it will have a higher growth than PRC,reason being Indian economy is less dependent on the world economy than China.It is much less integrated in comparsion to China

(2)PRC has good economists except that the communist party with it diverse interetd groups alone decide.

(3)The choice before PRC is fairly obvious,the purpose of QE is to force China to increae the value of RMB,to reduce its export.CCP is afraid that it might cuase further unemployment,unlike USA which is a democracy,CCP wouldnt survive if citizens are jobless.CCP has opted for domestic interest rate increase,but this will dampen the cheap money for its SOEs and provincial governments,the main drivers of GDP growth

(4)China's major advantage is its infrastructure,otherwise the world is filled with too many poor people who are willing to work.
 
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