China can teach the West a valuable lesson on inflation

[beijingwalker]

China can teach the West a valuable lesson on inflation​

April 14, 2022 — 11.22am

Judging by the latest inflation numbers, developed nations are turning into emerging markets. The US reported 8.5 per cent year-on-year jump in March, while inflation in the UK soared to 7 per cent, a 30-year high. Meanwhile, Chinese consumers saw only a 1.5 per cent rise in prices last month.

This is not how it’s supposed to work. If anything, inflation should be more pronounced in emerging markets, where logistics are less streamlined and commodities traders have fewer hedging tools.

President Joe Biden has pointed his finger at supply-chain disruptions, the fallout from Russia’s invasion of Ukraine and China’s renewed COVID restrictions. And he’s not entirely off the mark. Shanghai, the world’s largest port, is effectively closed, amid a lockdown to stamp out omicron. Right now, the city is too busy conducting daily mass tests and building makeshift quarantine hospitals to supply the world with electronics and toys.

As such, there’s an argument for shortening supply chains and bringing manufacturing to one’s home turf. For decades, American consumers benefited from the cheap labour in China. But it’s coming back to bite, as workers there are now forced to stay at home.

But supply disruptions are just one factor. How about inflation as a monetary phenomenon? In the US, there’s just too much money floating around, thanks to the pandemic stimulus checks and the Federal Reserve’s easing programs. Money-supply growth reached 27 per cent in February 2021, and despite all the talk of interest-rate hikes, the Fed was still funnelling cash into the economy with purchases of government notes as recently as a month ago.

By comparison, the People’s Bank of China has been more restrained. It cut its policy rates shortly after the Wuhan outbreak early in 2020, but started curbing direct monetary infusions just a few months later. In fact, it spent much of 2021 trying to slash borrowing, so as to slow the overheating real estate market.

By all means, Russia’s invasion into Ukraine is not easy on China, the world’s biggest importer of oil and agricultural products. But unlike the West, which is trying to fight off high energy prices with handouts and subsidies, China is prioritising self-sufficiency as a national security goal these days. President Xi Jinping always cast himself as a champion of green causes, but he recently made concessions on China’s carbon goals, calling for a “realistic” approach and encouraging coal production again. China can’t count on global markets for food security either, Xi said.

China is acting quickly in part because it recognises that rising prices are a political problem and can easily lead to social discontent. In recent years, while headline inflation has been tame, food inflation was not. Fruit got so expensive in the summer of 2019 that the Chinese joked their financial aspiration was only to achieve “cherry freedom” — the luxury of being able to afford imported fruit. The cost of pork prices soared in 2020. Every time crop prices climbed, Beijing was quick to assure the public and call the increases temporary.

While not democratically elected, the Communist Party is sensitive to public opinion. Food, for instance, accounts of an estimated 20 per cent of a typical consumer’s basket, whereas it’s about only 14 per cent in the US milk, vegetables, meat and fruit are the day-to-day items consumers look at to judge how their government is doing.]

Often, employers are not willing to match salaries to the rising cost of living. As such, soaring inflation directly erodes living standards — a concern even for politicians who don’t have to face voters.

China can teach the West a valuable lesson on inflation

While inflation is roaring in the West, China has managed to keep its figures under control with a different strategy.

www.smh.com.au

 

[beijingwalker]

With only 1.5% rise in prices last month, China can teach the West a lesson on inflation​

The US reported 8.5% year-on-year jump in March, while inflation in the UK soared to 7%, a 30-year high.
SHULI REN
14 April, 2022 03:30 pm IST

Shoppers wait for a store to open in London | Representational image| Bloomberg


Judging by the latest inflation numbers, developed nations are turning into emerging markets. The U.S. reported 8.5% year-on-year jump in March, while inflation in the U.K. soared to 7%, a 30-year high. Meanwhile, Chinese consumers saw only a 1.5% rise in prices last month.

This is not how it’s supposed to work. If anything, inflation should be more pronounced in emerging markets, where logistics are less streamlined and commodities traders have fewer hedging tools.

President Joe Biden has pointed his finger at supply-chain disruptions, the fallout from Russia’s invasion of Ukraine and China’s renewed Covid restrictions. And he’s not entirely off the mark. Shanghai, the world’s largest port, is effectively closed, amid a lockdown to stamp out omicron. Right now, the city is too busy conducting daily mass tests and building makeshift quarantine hospitals to supply the world with electronics and toys.

As such, there’s an argument for shortening supply chains and bringing manufacturing to one’s home turf. For decades, American consumers benefited from the cheap labor in China. But it’s coming back to bite, as workers there are now forced to stay at home.

But supply disruptions are just one factor. How about inflation as a monetary phenomenon? In the U.S., there’s just too much money floating around, thanks to the pandemic stimulus checks and the Federal Reserve’s easing programs. Money-supply growth reached 27% in February 2021, and despite all the talk of interest-rate hikes, the Fed was still funneling cash into the economy with purchases of government notes as recently as a month ago.

By comparison, the People’s Bank of China has been more restrained. It cut its policy rates shortly after the Wuhan outbreak early in 2020, but started curbing direct monetary infusions just a few months later. In fact, it spent much of 2021 trying to slash borrowing, so as to slow the overheating real estate market.

By all means, Russia’s invasion into Ukraine is not easy on China, the world’s biggest importer of oil and agricultural products. But unlike the West, which is trying to fight off high energy prices with handouts and subsidies, China is prioritizing self-sufficiency as a national security goal these days. President Xi Jinping always cast himself as a champion of green causes, but he recently made concessions on China’s carbon goals, calling for a “realistic” approach and encouraging coal production again. China can’t count on global markets for food security either, Xi said.

China is acting quickly in part because it recognizes that rising prices are a political problem and can easily lead to social discontent. In recent years, while headline inflation has been tame, food inflation was not. Fruit got so expensive in the summer of 2019 that the Chinese joked their financial aspiration was only to achieve “cherry freedom” — the luxury of being able to afford imported fruit. The cost of pork prices soared in 2020. Every time crop prices climbed, Beijing was quick to assure the public and call the increases temporary.

While not democratically elected, the Communist Party is sensitive to public opinion. Food, for instance, accounts of an estimated 20% of a typical consumer’s basket, whereas it’s about only 14% in the U.S. Milk, vegetables, meat and fruit are the day-to-day items consumers look at to judge how their government is doing.

Often, employers are not willing to match salaries to the rising cost of living. As such, soaring inflation directly erodes living standards — a concern even for politicians who don’t have to face voters. —Bloomberg

With only 1.5% rise in prices last month, China can teach the West a lesson on inflation

The US reported 8.5% year-on-year jump in March, while inflation in the UK soared to 7%, a 30-year high.

theprint.in

 

[Nan Yang]

Why is China’s inflation rate low compared to the US, Europe and Britain?

• Global inflation is soaring, reaching a 40-year high in the US, thanks to sky-high food and energy prices that have been exacerbated by the war in Ukraine
• But China’s inflation rate has been relatively low, due to its limited stimulus during the pandemic and the weighting of goods and services in its CPI basket

Frank Tang in Beijing
Published: 4:30am 17 Jun, 2022
View attachment 854644
China’s consumer price index grew 2.1 per cent in May from a year earlier, flat from April, though still at a six-month high. Photo: EPA-EFE

China’s benign inflation readings are in marked contrast to many advanced economies, giving the country space for more monetary loosening while the United States, the European Union and Britain hike rates.

The consumer price index (CPI) grew 2.1 per cent in May from a year earlier, flat from April, though still at a six-month high, which reflected rising prices for crude oil, farm produce and material imports.

In comparison, inflation hit at a four-decade high of 8.6 per cent in the US and 8.1 per cent in the Eurozone last month. It surged to 9 per cent in Britain in April.

The war in Ukraine has disrupted global markets for commodities, energy, fertilizers and grains, with the World Bank warning the conflict is set to cause the largest commodity price shock in five decades. China is largely self-sufficient in food, but it is alert to imported inflation due to surging global prices for energy and raw materials.

China’s core CPI, which excludes the volatile prices of food and energy, rose by 0.9 per cent year on year last month, unchanged from April. Headline inflation for the first five months grew by 1.5 per cent, comfortably below the government’s full-year maximum of 3 per cent.

The producer price index (PPI), which measures the prices for products as they leave factories, rose by 6.4 per cent in May, down from a peak of 13.5 per cent in October 2021.

Why is China’s inflation rate lower than in Western countries?

Chinese officials and academics have attributed the divergence to Western stimulus measures, notably the unprecedented money printing used to save economies battered by the coronavirus pandemic.

The US Federal Reserve’s balance sheet has more than doubled in the past two years to US$8.9 trillion, while Beijing, which was cautious about an all-out stimulus, has refrained from excessive loosening.

But part of the reason also comes down to the weighting of goods and services that make up China’s CPI basket.

While China gives more weight to clothes and food, which fits its status as an upper middle-income country, the US places more emphasis on shelter and transport, both of which are easily affected by global energy prices and domestic monetary conditions.

Authorities have not disclosed the weighting of China’s CPI basket, which was changed in 2021. However, Huang Wentao, an analyst with China Securities Co, estimated the weighting for food increased to 18.4 per cent, versus 7.8 per cent in the US.

For clothing, China’s weight is 6.2 per cent versus 2.8 per cent in the US, according to Huang.

Rent accounted for 16.2 per cent, about half the US weighting at 32 per cent, while transport was 10.1 per cent in China, lower than 15.1 per cent in the US, he said.

In addition, the US economy relies heavily on imports of consumer products, whereas China’s massive industrial capability means it has more room to deal with the price hikes for global commodities.

Why have China’s rising producer prices not fed through to CPI?

PPI and CPI used to have a strong correlation – consumer prices would follow suit if prices for production materials rose or fell. In China’s case, however, the correlation has been weakening in recent years because of hog and grain cycles.

China’s PPI fell 3.7 per cent in May 2020, but grew 13.6 per cent in October last year, while domestic consumer prices remained relatively stable.

“China’s hog cycle makes food prices and industrial product prices divergent,” China Securities Co said in a note in January.

“Other reasons include the fall of downstream demand and the rise of competition.”

China’s lower inflation, some argue, is partly a result of plunging domestic demand caused by Beijing’s zero-Covid policy, which has been used to contain the highly contagious Omicron variant since March.

Retail sales continued to contract by 6.7 per cent in May, but the pace was slower than the steep fall of 11.1 per cent in April.

Pork prices have played a big role in consumer inflation cycles, with an estimated weight of 2.4 per cent in the CPI basket. Prices for pork, the staple meat on Chinese tables, fell 37 per cent from a year earlier in the first five months of 2022.

Meanwhile, as China is so central to global manufacturing – particularly after overseas capacity was hit by the pandemic in 2020 – rising production costs have been mostly absorbed by overseas buyers or producers.

Will China be able to manage consumer inflation?

Beijing is still on high alert for inflation, as it has been a factor in social instability in the past.

The central bank governor Yi Gang said in April the primary objective of China’s monetary policy is to stabilise prices and employment.

Inflation also influences the ratio of Chinese household debt to gross domestic product (GDP), which jumped to 61.6 per cent last year from 17.9 per cent in 2008, a situation made worse by the pandemic.

On the ground, ordinary people’s perception of consumer inflation is far larger than what is reflected in official figures. For instance, China’s rising petrol price, influenced by a 68 per cent year on year rise in international crude prices, is forcing many families to switch to public transport or electric vehicles.

The grain price between January and May rose 2.2 per cent from a year earlier, while egg prices rose 6.8 per cent. Edible oil is up 3.7 per cent and vegetables up 8.7 per cent, government data showed.

Ensuring domestic supply of grain and energy is a key task for the government.

Some analysts worry China’s CPI could rise with surging crude oil and grain prices. The World Bank estimated the prices for both Brent crude and wheat would increase by around 40 per cent this year from 2021.

Chinese inflation will be mainly affected by price rises stemming from the Ukraine war, lower external demand and a rebound in the yuan, China International Capital Corporation said in a note on Tuesday.

“Domestically, the upcycle of pork prices and the economic rebound will drive up consumer prices, but the median level may be still benign,” the investment bank said, expecting a full-year rise of around 2.1 per cent, which is still within the government’s tolerance range.

 

[mili]

Another factor is west workforce is decimated by covid & mrna, adding to inflation.

 

[lcloo]

Lessons learned from Trump's trade war and Russian Ukraine war. Do NOT embargo your main suppliers or impose high tariff on imported goods.

Globalization of trade emsures ample supply and afforable goods. Economics 101 - Chapter on Specialization of Trade.

 

[Daniel808]

Only China that different than the others