When you get too much credit growth, you usually get goods and services inflation as a result. That’s especially the case in developing economies that don’t have sophisticated financial markets to soak up all the credit growth and translate it into ‘beneficial’ asset price inflation.
The Financial Times reports that the Peoples Bank of China governor Zhou Xiaochuan says China must be on ‘high alert’ against inflation. The comment comes after China’s inflation rate jumped to a 10-month high of 3.2% last week. Speaking at the central banks news conference yesterday, Zhou said:
‘In the past some of us thought it was no big deal if inflation was a little bit high, growth will be a little faster and then we can control inflation afterwards. But international experience and our own experience here show that this thinking might not be correct. It requires careful attention to maintain low inflation.’
Herein lies China’s problem. Controlling inflation at the tail end of a historic credit boom is no easy feat. If you don’t move to tighten, the boom becomes crazier. If you tighten too much you burst the bubble and then have a destabilising asset price deflation on your hands.
The FT article goes on to state:
‘Mr Zhou’s comments put China at the opposite end of the policy spectrum from the US and Europe, where central banks have kept monetary conditions extremely loose in order to rev up sluggish growth.
‘The split with other central banks is not an ideological rift so much as an acknowledgment of China’s very different economic reality, where even a moderate policy loosening last year led to a sharp rise in credit issuance, a pick-up in growth and, lately, the threat of inflation.’
We would argue that China is simply a little further back down the road than the US and Europe. The West has travelled this path before with their own credit booms. And in their failure to recognise the losses brought about by the bust and write off of bad debts, these economies are still struggling in a very low growth, almost recessionary environment.
They’re no longer concerned about inflation. But it’s something China still has to deal with. This is probably why governor Zhou will stay in the job beyond the mandatory retirement age of 65. He’s been around a while and the Communist Party probably doesn’t want a new governor tinkering with things at such a delicate juncture.
We’ve been bearish on China for a while and have called this recovery a sham. But at this early stage of the ‘recovery’ we thought China’s economy would be exhibiting more strength than it currently is. That’s especially considering the resurgence in credit growth over the past few months (although February’s figures were the weakest since November last year).
But the economic recovery has been a narrow one, enjoyed mostly in the ‘fixed asset investment’ sector – namely property. The chart below shows that property investment is again running back above a 20% growth rate, while the growth rate of manufacturing investment has declined.
This is not the growth China’s leaders want. But it’s about the only growth they’re getting, because they don’t have the will to make the necessary changes to curb it. There’s too many connected people making too much money from the boom. Everyone is ‘getting rich’ (everyone who matters, anyway) and when that happens, it’s very difficult to take away the punchbowl.
2013 is looking increasingly like the year that China will make the tough transition to a lower, more sustainable growth rate. This is a good thing from a longer term perspective. But it will be VERY destabilising in the short term.
So we watch, and wait.
Oh, in other news, some black smoke was seen pouring out of a chimney in Rome, indicating that the most backward and conservative institution in the world just elected a new boss. Yawn.
for Markets and Money
Ben Bernanke’s Pseudo Logic
8-03-13 – Dan Denning
China: The Biggest Bubble Ever?
7-03-13 – Bill Bonner
The Disaster of Central Planners and Other Simpletons
6-03-13 – Bill Bonner
What the Shale Gas Revolution Could do to LNG Prices
5-03-13 – Dan Denning
Politicians Are Clowning Around With Your Wealth
4-03-13 – Dan Denning
You must download and read this report NOW.
As of 1 January, 2017, the Australian government will introduce harsher asset test changes that could affect your income.
Inside your free report, rogue economist Vern Gowdie reveals what he believes you could do right now to boost your age pension income. If you’re at, or near, retirement age…download Vern’s report today.
- Three ways you could boost your age pension payments now: Trying to squeeze a few extra bucks out of the government can be like drawing blood from a stone. It’s HARD. Fortunately, Vern’s discovered three ways you could boost your age pension payments (number #3 will surprise you).
- Will you be hit by the age pension changes in 2017: As of 1 January, 2017, the Australian government will introduce a series of harsher asset test changes for the age pension. Will your income be hit by the new changes? Download Vern’s report to find out.
- Retire in luxury overseas (on the cheap): An increasing number of Aussies are packing up and moving overseas to retire. No wonder. Your total living expenses in an exotic location like Thailand or Costa Rica could be HALF what you’d expect to pay here in Australia. Cheap food, rent and medical costs are just some of the reasons waves of retirees are heading for warmer climates permanently. How does a shift overseas affect your pension entitlements? Vern explains in his report.
To download your free report, ‘What You Need to Know about Changes to the Age Pension’, simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.
You can cancel your subscription at any time.