Bloomberg: Inflated Notions
Early last week, I went on Bloomberg to talk about China’s latest economic figures, and boy did I kick up a hornet’s nest. In a nutshell, I said that I was finding it harder and harder to reconcile China’s official CPI, GDP, and PMI numbers with what I was seeing and hearing on the ground. The interviewer, Susan Li, appeared surprised by my comments and Shanghai-based blogger Adam Minter called them “unspeakably stupid.” You can click here to watch for yourself.
The key to understanding my remarks is that they are a reflection, not of certainty, but uncertainty. Watching Susan’s reaction, one might easily get the impression I’m handing down a verdict, that I know the official numbers are wrong because I know what the real numbers should be. In fact, I’m struggling with a dilemma: how do I speak to what the official headline figures are telling us when they appear to be at odds not only with my own personal observations, but with other official data that are probably more significant and revealing?
In my Bloomberg remarks, I made three core assertions:
- That the reported decrease in China’s consumer inflation rate (CPI) does not seem to accord with my own daily experience of rising prices in China;
- That there is reason to suspect the Chinese economy may be growing substantially below China’s reported real GDP growth rate of 8.1% for Q1, and may actually be in contraction (negative growth); and
- That Chinese companies I have been talking to are seeing flat performance (near zero growth) in Q1, compared to last year.
Each of these are worth looking at in turn — particularly now that the main economic figures for March and Q1 have been released and can be examined in detail.
My first assertion is that the decrease in China’s consumer inflation rate (CPI) — 3.6% in March, down from a peak of 6.5% last July — does not seem to accord with my own daily experience of rising prices in China. On Bloomberg I offered, as a counterpoint, the fact that the price of the fresh milk I have delivered to my home had, just that weekend, risen by 33%, from 6 yuan/bottle to 8 yuan/bottle.
Now I want to be clear that I am not claiming consumer inflation in China is actually running at 33%. I’m simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government’s declared “success” in getting inflation under control.
To be fair, this particular price hike is more likely due to rising delivery charges than the price of milk itself. The Chinese media has been buzzing these past few weeks about rapidly rising logistics costs, across the board, which are expected to translate into even greater price hikes in the weeks and months ahead.
But food itself has long been a source of concern, and this is hardly the first time I’ve noted a disconnect between my own observations and the official numbers. Back in August 2010, before inflation really took off, I wrote a post on the “KFC Index,” noting that the price of my own regular meal at KFC had risen by 32.6% since the year before, from RMB 21.50 to 28.50, far higher than the official rate of food inflation. After my Bloomberg appearance last week, I figured I ought to check out and see where it stood now. The same meal — large popcorn chicken, small fries, large Coke — now costs RMB 33.00, a 53.5% increase since I made my first observation, two years and 8 months ago. On a compounded annualized basis, that works out to an inflation rate of 17.4%.
Two years ago, a business buffet I often go to charge RMB 99/person; it now costs RMB 158, a 61.2% increase, or 27% on a compounded annualized basis. Our local foot massage place (a popular pastime in China) recently raised its prices 20%, from RMB 168/hour to 198. Gasoline prices at the pump in China are more than 50% higher than three years ago, rising 10% just this last month — the second hike in less than two months — as you can see in this Reuters video. (China’s elimination of fuel subsidies, which kept gasoline prices artificially low, is probably a good thing on balance, since they encouraged over-consumption, but it still hits people in the pocketbook.)
Some have suggested that the price increases I’m seeing reflect a higher rate of inflation in Beijing than elsewhere in China. That’s certainly possible, but it doesn’t help reconcile them with official figures. According to the official CPI numbers for February, inflation in Beijing stood at 3.5%, barely above the national figure of 3.2% for that month.
None of this necessarily means the National Bureau of Statistics (NBS) is lying, or making up numbers out of thin air. CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it. I’m sure you could come up with a basket that shows consumer inflation at 3.6%. Whether that reflects what consumers are actually feeling, though, is another matter. The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention. That keeps the prices for the select items — and the index — down, for a while at least. But it doesn’t solve price pressures, it only distorts their impact on the economy.
Last summer, for instance, the Chinese government dumped a big chunk of its 220,000-ton strategic pork reserves onto the market. That helped ease prices, but it also lowered the profit incentive for farmers to raise and supply hogs, which could lead to shortages and/or higher prices in the long-run. The government fined Unilever for talking about raising soap and detergent prices due to soaring raw material costs. Although it later allowed those price hikes to go forward, the government leaned heavily on both Chinese and foreign companies to avoid raising their prices. Such practices continue. Just last week, the NDRC pressured two Chinese cooking oil producers into postponing a planned price increase for at least two months, and called Nestle in for “consultations” over a recent increase in the price of its baby formula products.
And then there are taxis. Besides a negligible (1-2 yuan) flat fuel surcharge has been added, that rate for taxi fares in Beijing hasn’t changed since 2006 (six years) even though fuel prices in that period have soared. The result is a dire shortage of available taxis, especially at peak periods, despite the fact that most people I talk to in Beijing — and I’m talking local people, not foreigners — are able and willing to pay more, if it meant they could find a cab. I’m told, by reasonably reliable sources, that the reason the authorities refuse to raise the fare is that taxis are in the CPI basket, and it would boost the official inflation figure.
A critic might contend that, because I’ve been warning of the dangers of inflation to China for some time, I’m just reluctant to accept the official figures now that they inconveniently contradict the story I’ve been telling. This kind of argument is a major reason why I’ve resisted raising my concerns about the official data: once we start throwing out numbers we don’t like, it’s hard to know where to draw the line. The truth is, however, I don’t feel like I have anything at stake here, one way or the other. My warnings about inflation (here and here) were born out long ago: inflation rose higher, and remained higher longer, than either the government or conventional analysts were predicting in 2010.
Now that the monetary expansion has peaked, and China’s investment boom is slowing (more on that in a moment), one would not be surprised to see prices dropping — even collapsing — as a result of the inflationary bubble popping. In fact, that is precisely what we are seeing in property and property-related inputs. The -0.3% drop in the Producer Price Index (PPI) matches up well with the the industrial slowdown I’m seeing. We may yet see a downturn in wages if that slowdown continues or deepens. But for a number of reasons, including people cashing in inflated assets, as well as the bottled-up pressure from earlier price controls, the everyday cost of living continues to rise. That suggests that inflation is turning into stagflation, a problem that places serious constraints on the Chinese government’s ability to pump money in to reignite growth.
There is no way to definitively prove that prices in China have risen, and continue to rise, faster than official CPI indicates. One could, of course, devise a transparent basket of one’s own and collect independent price data from cities across China. But the Chinese government strongly discourages such projects, to put it mildly. Absent an alternative measure, we are left with impressions and pieces of data. However, the fragments I’ve pulled together here offer some basis for asking skeptical questions about whether China’s latest CPI figures fully capture the everyday impact of inflation or the real constraints on Chinese policymakers.
I’ve covered the first of the three assertions in my Bloomberg interview. In the interests of readability, I’m going to break here for the moment and examine my second controversial assertion — that China’s economy may be slowing more severely than the headline GDP number suggests — in my next installment.