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CCTV News: China 3Q10 Economic Figures

October 21, 2010

I was on Bloomberg TV and CCTV News today, talking about the release of China’s September and 3rd Quarter economic figures for GDP and inflation.  I will post a link to the Bloomberg interview if they post it online.  In the meantime, you can check out my CCTV interview (alongside fellow guest Professor Huo Deming of Peking University), where I basically said the same things.

The first clip focuses on the GDP growth figures, which slowed from 11.9% in 1Q, to 10.3% in Q2, to 9.6% in Q3.  I note that while markets tend to dislike any slowdown in growth, runaway growth fueled by money creation, which produces empty buildings and unused ports and airports is NOT a good thing.  A moderation in China’s growth right now, putting it on a more sustainable growth path, IS a good thing, and should actually reassure markets.

The second clip discusses inflation and China’s recent interest rate hike.   Many people were afraid that China’s CPI would hit 4.0% in September, and breathed a sigh of relief when it came in at 3.6%.  That’s still the highest rate this year, a continuation of the steady upward trend that we’ve seen all year long.  But it’s even more revealing to look at the components of that CPI figure.  Food inflation is running at 8.0% (compared to 7.5% in August).  The price of vegetables are rising by 18%.  The prices for manufactured goods, on the other hand, are rising only slowly, holding down the rest of the index.  That makes sense, since much of the money that was created went into fixed asset investment and expanded capacity for those products.

Inflation has to work its way through an economy, and does so unevenly.  It is like a flood flowing across a landscape filled with hills and valleys.  Understanding the topography of that landscape is critical to following its course.

2 Comments leave one →
  1. David Stinson permalink
    October 26, 2010 2:45 pm

    What you said here doesn’t make sense, on its own. You said, “The prices for manufactured goods, on the other hand, are rising only slowly, holding down the rest of the index. That makes sense, since much of the money that was created went into fixed asset investment and expanded capacity for those products.”

    Inflation doesn’t really have anything to do with the amount of investment in a sector. The way I’m picturing the series of events, the PBOC and other banks are throwing money to SOEs and anyone else with connections. Since there aren’t really that many investment opportunities, the money must be going to line somebody’s pockets. So these fat cats go and buy gold, jade, and Beijing real estate. Goods manufactured in China, perhaps not so much. These are long term preferences, and not likely to change as the money diffuses around the economy.

    The exception is when the investment in a sector goes towards cost-cutting. It’s possible that some of the money, when it is usefully spent, is doing that. However, most Chinese firms seek to move up the value chain, not down it. Is that low inflation figure in manufacturing really capturing increased value, and that’s the reason why they had to adjust the prices down? Or is it that the demand for them really isn’t that high? I think the second explanation makes more sense. I haven’t heard about a sudden increase in the quality of goods in China. I don’t know everything about China, but I think the more likely explanation is that the stimulus money is all going to big tycoons who buy luxury products, and poor workers who buy vegetables. The lack of manufacturing inflation simply reflects the absence of a middle class in China, and that isn’t likely to change in the near future.

  2. November 18, 2010 10:31 am

    “The price of vegetables are rising by 18%. ”

    Remember the Dairy scandal that was a big deal a few months (years?) back? Price increases aren’t always a bad thing… China was previously marketing very shoddy quality milk, and when regulators did a little digging they found that standards were abysmal. The crackdown hurts profitability.

    If similar industries are actually being regulated (eg. using good quality fertilizers/clean water, etc) we should expect the cost of doing business, and hence, consumer prices to go up (while profitability goes down, of course).

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