12-AUG-08: CPI inflation in China 6.3 per cent in July 2008

The National Bureau of Statistics in China announced today that the July 2008 CPI inflation rate further eased to now 6.3 per cent over July 2007. This is the lowest CPI inflation rate recorded since 10 months and a significant relieve from 8.5 per cent in April, 7.7 per cent in May and 7.1 per cent in June. Like in earlier months the CPI growth was driven by food items in the CPI basket. Prices for “food stuff” increased by 14.4 per cent, which, however, is a strong relaxation over previous months (May: 19.9 per cent; June: 17.3 per cent). The easing of the inflation rate was expected, but the strong decrease came as a positive surprise.

RMB/USD exchange rate: 2008 appreciation (ytd) is 6.73 per cent at end-July

Monthly appreciation of the RMB slowed in July to 0.32 percent, down from 1.14 per cent in June. This continues the unsteady path of apprecitaion in 2008: The pace clearly lost momentum in April, rebounded in May and June and is down again now. Still, accumulated appreciation of the RMB/USD exchange rate in 2008 now is at 6.73 per cent.

Domestic loans (RMB) increase by 14.12 per cent in China at end-June 2008

RMB loans increased by 14.12 per cent year-on-year in June 2008, down 0.74 per cent. This is good news since domestic loan increases are back to the “neutral stance” of 10 to 15 per cent (Geiger, 2008: 27-28; and http://mgeiger.wordpress.com/strategy/). Now four months with below-15-per-cent growth rates (March, April, May and June) clearly hint to easing inflation pressures. This, however, only with a considerable time-lag of about 5 to 12 months.

Broad money (M2) grew 17.37 per cent in China at end-June 2008

Money supply measured by the broad monetary aggregate M2 increased by 17.37 per cent year-on-year in June 2008, down 0.7.per centage points from the end of May. While the rate is down now again, it is still above the recent past’s annual growth rates (16.9 per cent in 2006,and 16.7 per cent in 2007), and thus suggesting the inflationary threat to continue.

18-JUL-08: CPI inflation in China 7.1 per cent in June 2008

The National Bureau of Statistics in China announced today that the June 2008 CPI inflation rate was 7.1 per cent over June 2007. This is a significant relieve from 8.5 per cent in April and 7.7 per cent in May. As  before the main driver of inflation growth in June was price increases for “food stuff”, but down from May (19.9 per cent) to now 17.3 per cent. The rate was widely expected prior to the announcement. While this is good news, it is too early to declare victory over victory. The drop of the rate has also to be seen on the backdrop of the high inflation rate in June 2007, which was the first month that showed higher than 4 per cent inflation last year.

CPI inflation in China: Forecasts above 7 per cent for June 2008

The June CPI inflation rate for China will be published officially on 18 July 2008. Bank of China reportedly estimates that the published rate would be between 7.1 and 7.4 per cent, thus further cementing a yearly 2008 inflation rate above 7 per cent.  So says also the latest forecast of the Chinese Academy of Social Sciences (CASS), which published a report this month forecasting about 7 per cent for 2008.

Still, Zhou Xiaochuan, the governor of the PBC, mentioned at a conference of the Bank for International Settlements in Basel, Switzerland, that inflation is likely to fall in summer. For him, inflation would ease in summer because “we’ve got a good harvest, and some supply policies have started bearing results.” Having in mind that other global forces are driving up prices, such as energy and other commodities, this statement has to be treated with caution.

However, a stabilization of rates around 7 per cent would be a good first step. towards lower inflation rates. Following May, June would be the second month of below 8 per cent if current predictions hold. But the drop of the rate from 8.5 per cent in April to now 7.1 per cent should also be seen on the backdrop of the high inflation rate in June 2007. June was the first month that showed higher than 4 per cent inflation last year.

RMB/USD exchange rate: 2008 appreciation (ytd) is 6.41 per cent at end-June

The first two quarters of 2008 brought an appreciation of the RMB/USD exchange rate of 6.14  per cent with 4.18 per cent in Q1 and 2.23 in Q2 2008. Accumulated appreciation since July 2005, when RMB reforms started, is 20 per cent now from RMB/USD 8.28 to 6.86. The appreciation pace clearly rebounded in May and June after it had lost some momentum in April. This suggests that authorities indeed count on RMB appreciation to curb inflation in the current inflationary environment.

18-JUN-2008: UNCTAD Discussion Paper published on “Instruments of monetary policy in China and their effectiveness: 1994–2006″

The United Nations Conference on Trade and Development (UNCTAD) published the long-awaited paper on “Instruments of monetary policy in China and their effectiveness: 1994–2006” in its Discussion Paper Series. The paper argues: “China’s monetary policy applies to two sets of monetary policy instruments: (i) instruments of the Central Bank (CB), the People’s Bank of China (PBC); and (ii) non-central bank (NCB) policy instruments. Additionally, the PBC’s instruments include: (i) price-based indirect; and (ii) quantity-based direct instruments. The simultaneous usage of these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influences of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general.” The paper - among others - builds the basis of this blog.

Concern over inflation fuel expectation to raise interest rates

After the pulication of the May 2008 inflation rate earlier this month, which was at 7.7 per cent, expectations to raise interest rates gained momentum towards the end of June. The rumours said that a increase in the interest rates was imminent, possibly over the weekend 28-29 June. While it is difficult to say where this information comes from, it had great impact on markets in the last days: China Daily headlined on  28 June “Shares plummet amid fear of interest rate hike” while Bloomberg wrote on 26 June “China’s Bonds fall on speculation central bank to raise rates“.

Michael Pettis of ChinaStakes.com provides an excellent analysis of the current situation: “If rumors of further interest rate increases can cause so much damage to the stock markets (and, I suppose, to the real estate markets), I am very skeptical about the ability of the PBoC to get approval actually to raise them further, as Governor Zhou seems to hope and has implied in recent comments. This may be a dangerous prediction to make, given all the rumors of an interest rate hike over the weekend, but I doubt the government has much appetite for further sharp declines in stock and real estate prices, especially so close to the Olympics.” He is right! Certainly, there are other instruments of monetary policy in China - such as window guidance! But pro-growth considerations should not rule out to use the full monetary policy tool box at hand to fight inflation.

Domestic loans (RMB) increase by 14.86 per cent in China at end-May 2008

RMB loans increased by 14.86 per cent year-on-year in May 2008. Even though this is a very slight rebound of 0.16 per cent, this is good news since it means that domestic loan increases are back to the “neutral stance” between 10 and 15 per cent that lead to inflation rates of around 1 to 3 per cent (Geiger, 2006: 38-39; and http://mgeiger.wordpress.com/strategy/). Theoretically, domestic loan figures of March, April and May 2008 - all with below-15-per-cent growth rates - do hint to easing inflation pressures. However, there is a time lag in the transmission of domestic loan changes to the inflation rate of about 5 to 12 months. Thus, the current trends would lead to an easing of inflationary pressures at the end of the year earliest. What worries me most at this stage, is that rising money supply again in May could in turn again drive up domestic loans in the coming months.