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China Hides Rampant Inflation in Money Binge:
Patrick Chovanec
By Patrick Chovanec - Oct 20, 2010 3:00 AM GMT+0800
Bloomberg Opinion
High-end property prices in dozens of Chinese cities have doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at $3,000 an ounce, up 50 percent in the past couple of months, while packets of certain types of dahongpao tea are going for $30,000 a kilogram.
Now there are signs that inflation is spilling over into consumer prices. China’s CPI has been climbing steadily all year, and Chinese officials are making noises about raising their CPI target to 4 percent or even higher.
Food prices gained 7.5 percent in August, from a year earlier. Economists estimate wages are rising about 8 percent. HSBC Holdings Plc’s Purchasing Manager Index survey for August reported a marked increase in input costs being passed along in higher output prices.
Boom to Bust
As inflation comes out from hiding, authorities may be forced to sharply rein in liquidity, turning China’s cash-fueled boom into a bust.
If it seems like there’s a lot of money sloshing around the Chinese economy, that’s because there is. Over the past two years, M1 expanded by 56 percent, M2 by 53 percent. Currently, even with much-touted “cooling measures,” both are still growing at an annual rate of about 20 percent.
Unlike the U.S., China never really had a fiscal stimulus, where the government spends its own money directly. The funding for infrastructure and other projects to juice up the Chinese economy came almost entirely from a boom in lending by the state-run banking system.
In 2009, those banks made almost 10 trillion yuan in new loans -- more than double any previous year -- expanding the country’s loan portfolio by a third. This year, they will probably lend 8 trillion yuan, almost twice as much as in 2008.
Cascade of Loans
Where did all that money come from? It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing.”
The pressure behind this monetary eruption had been building for some time. For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign-exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.
To prevent that, authorities try to “sterilize” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central-bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.
Patrick Chovanec
By Patrick Chovanec - Oct 20, 2010 3:00 AM GMT+0800
Bloomberg Opinion
High-end property prices in dozens of Chinese cities have doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at $3,000 an ounce, up 50 percent in the past couple of months, while packets of certain types of dahongpao tea are going for $30,000 a kilogram.
Now there are signs that inflation is spilling over into consumer prices. China’s CPI has been climbing steadily all year, and Chinese officials are making noises about raising their CPI target to 4 percent or even higher.
Food prices gained 7.5 percent in August, from a year earlier. Economists estimate wages are rising about 8 percent. HSBC Holdings Plc’s Purchasing Manager Index survey for August reported a marked increase in input costs being passed along in higher output prices.
Boom to Bust
As inflation comes out from hiding, authorities may be forced to sharply rein in liquidity, turning China’s cash-fueled boom into a bust.
If it seems like there’s a lot of money sloshing around the Chinese economy, that’s because there is. Over the past two years, M1 expanded by 56 percent, M2 by 53 percent. Currently, even with much-touted “cooling measures,” both are still growing at an annual rate of about 20 percent.
Unlike the U.S., China never really had a fiscal stimulus, where the government spends its own money directly. The funding for infrastructure and other projects to juice up the Chinese economy came almost entirely from a boom in lending by the state-run banking system.
In 2009, those banks made almost 10 trillion yuan in new loans -- more than double any previous year -- expanding the country’s loan portfolio by a third. This year, they will probably lend 8 trillion yuan, almost twice as much as in 2008.
Cascade of Loans
Where did all that money come from? It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing.”
The pressure behind this monetary eruption had been building for some time. For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign-exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.
To prevent that, authorities try to “sterilize” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central-bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.
