China just cannot do anything wrong, at least that’s what the government and some economists think

There is a lot that may not look right with the Chinese economy. Yet the faith that the Chinese government and foreign economists place in Chinese regulations, restrictions and policies remains absolute

Laws are supposed to solve problems. A government perceives some sort of economic or social problem. Then in step the technocrats, the bureaucrats, or the executive, and implements a solution, a regulation, or a policy. There is one problem, unintended consequences. Certain people may not believe that a government decision works for them, so they find a way around it. An excellent example is inflation in China. It is out of control.

In China the government's economic policies have a great deal of street cred. After all, didn't China use its control over the banking system to avoid a major recession that crippled the West? Haven't they successfully engineered constant, rapid, often double-digit growth? According to the Financial Times, economists think that China can do it again. "Most economists expect inflation to peak this month and begin to ease in the second half of the year as Beijing's tightening policies take effect." Many economists also expected the central bank's rate increase in July to be its last for the year. In June, Chinese premier Wen Jiabao encouraged these views by declaring victory over inflation. Mr Wen wrote that "China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies. These have worked."  

It seems that 'most economists' have a lot of patience as well as almost religious belief in China's ability to control its economy. Sadly, the Chinese government first started 'tightening' in February of 2010. As part of its tightening programme it has raised reserve ratio requirements four times in 2011 and interest rates five times since October 2010. But it hasn't stopped inflation.

Consumer price inflation has been rising since the middle of 20l0. It reached a 34-month high of 5.5 % and then topped that in June, when it rose to 6.4%. This is the highest inflation rate since June 2008, when CPI hit 7.1 %. The only thing that stopped inflation then was a global meltdown. Even the headline number might be too low. Food prices rose 14.4 % from a year earlier in June, exacerbated by a 57 % increase in the price of pork.

Like prices, growth shows no sign of slowing. The Chinese economy did dip to a 9.5% growth in the most recent quarter, but industrial production has increased 15.1% since May. Retail sales in June are up 17.7% and real estate is still booming despite efforts to control it. Housing sales in June rose 31 % from May and China's largest developer, Vanke Co, reported that sales had increased 79 % this year.

To slow this torrid growth in prices, the Chinese have resorted to restrictions and controls rather than the market. They required sellers of pork, rice, noodles, cooking oil and other staples to ask permission before raising their prices. They even fined the international consumer goods firm Unilever, for announcing planned price rises.

The problem with these mandates is that they don't work. The Chinese, like Wall Street banks, are past masters at getting around regulations. According to the People's Bank of China, of the 14.27 trillion yuan of new credit extended in 2010, about 41.5 % came from other non-bank channels. Just published figures reveal that local government debt had soared to $1.7 trillion, or about 27 % of the nation's gross domestic product. To get around restrictions on lending, local governments created 6,576 local government investment vehicles, which are not included on the state-owned banks' balance sheets along with other off-balance sheet dodges like entrusted loans.

So despite the tightening efforts, China's banks succeeded in extending 633.9 billion yuan ($98 billion) of loans last month, which represents an increase of 14.9 % from May. The money supply is also out of control. M2 growth rate rose to a three-month high of 15.9 % in June, accelerating from 15.1 % from May, which according to a local economist was "unexplainable". A Credit Suisse report states that Chinese credit growth has reached a critical level, which in other countries has signaled a sudden downturn.

One thing that the Chinese could do to tame inflation would be to subject the yuan to market forces, but they have no intention of doing so. Instead they have to print yuan to buy all the foreign exchange streaming into the country. As its foreign reserves rise to unsustainable levels, so does its rate of inflation.

The off-balance sheet lending spree has created another mountain of bad loans that may be as high as $400 billion. A Fitch ratings gauge suggests that China faces a 60% risk of a banking crisis by mid-2013.

And yet the faith that the Chinese government and foreign economists place in Chinese regulations, restrictions and policies remains absolute. China simply cannot have either a hard landing or hyper inflation and that's the law.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)




5 years ago

The author appears to think that markets are the ultimate and no intervention is needed to control prices. Unfortunately this theoretical asumption is not valid in actual practice especially when it pertains to food items which cotribute a lot to inflation. We have the example in India where some items like tomatoes are destroyed since vested interests would not like prices to fall because of abundant supply. Intervention is definitely needed to make the produce reach the market and prices are correspondigly controlled. This applies to many items where the supply is sufficient but the prices are artificially jacked up.

India is 2nd largest recipient of WTO Aid-for-Trade: Report

In 2009, Aid-for-Trade commitments reached approximately $40 billion, a 60% increase from the 2002-05 baseline period," the WTO report said and suggested that "other official flows doubled, reaching $51 billion in 2009, a likely reflection of the donor response to the global economic crisis

Geneva: India remained the second largest recipient of WTO Aid-for-Trade in 2009, receiving assistance of over $1.5 billion, even as global commitments to create physical and institutional infrastructure to multiply trade opportunities shot up to $40 billion, reports PTI.

The report was jointly prepared by the Paris-based Organisation for Economic Cooperation and Development and the World Trade Organisation (WTO). It was released on Monday.

"Asia now ranks as the second largest regional recipient, with $15.4 billion (38% of total flows)," it said.

However, Aid-for-Trade (AfT) flows to India declined in 2009 from a high of $3.4 billion in 2008.

"So far, Vietnam has received maximum assistance under AfT, while its other leading beneficiaries include Uganda, Afghanistan, Nigeria, Indonesia, Pakistan, Kenya, Bangladesh, Ethiopia and China, among others," it added.

AfT was conceived at the WTO's sixth ministerial meeting in Hong Kong with an aim to help countries facing structural and capacity-building constraints.

"AfT is acting as a catalyst for the private sector and it remains unaffected by the global crisis," said ambassador Valentine Rugwabiza, the WTO's deputy director general.

"Private sector must play a dominant role in AfT projects in infrastructure and logistics," she added.

Ahead of the third global AfT review at the WTO, beginning Wednesday, the report attempts to showcase the positive spin-offs arising from the growing commitments to prioritising trade-related infrastructure.

"In 2009, Aid-for-Trade commitments reached approximately $40 billion, a 60% increase from the 2002-05 baseline period," the report said and suggested that "other official flows (OOF) doubled, reaching $51 billion in 2009, a likely reflection of the donor response to the global economic crisis."

Even as Doha Development Agenda (DDA) negotiations remain inconclusive and Europe faces a financial crisis, it said, "Disbursements have been increasing at a constant growth rate of between 11%-12% for each year since 2006, reaching $29 billion in 2009, indicating that past commitments are being met."

With the industrialised countries caught in grave fiscal and budgetary crises, the South-South assistance for AfT offers a window of opportunity, the WTO official said, adding that capacity building and creating new physical infrastructure is essential to realise the advantages of trade liberalisation.


NAPM says builder mafia behind arrest of RTI activist Kamlakar Shenoy

National Alliance of People’s Movements considers protest petition to the government for targeting Mr Shenoy who had filed complaint on slum rehabilitation scam

National Alliance of People's Movements (NAPM) will send a petition to the government, protesting against the arrest of RTI activist Kamlakar Shenoy last week. Mr Shenoy was arrested by Vasai police on Saturday evening, at Dadar, and he has been remanded for three days police custody. He has been arrested on two-year-old complaint by a builder under the Prevention of Atrocities Act.

Activists have alleged that Mr Shenoy's arrest is the handiwork of a builder mafia that is pressurising the Maharashtra government to withdraw the resolution that was promulgated after a nine-day fast by Ms Medha Patkar for an independent inquiry into scams related to slum rehabilitation projects. NAPM says Shivalik Ventures, a construction company, is behind Mr Shenoy's arrest, as he had blown the lid off the Golibar land scam in which the company is alleged to have been involved.

Mr Shenoy had exposed that Shivalik had flouted several rules in 150 buildings, cheated CIDCO of Rs2 crore in revenue and had illegally encroached on the firing range of the Indian Air Force in Golibar. Shivalik had stated that the land never belonged to the army and it had approached the government for a no-objection certificate to start construction on a land area of 62 acres.

After Mr Shenoy lodged a complaint before the Magistrate's Court, Shivalik's proprietor Ramakant Jadhav filed a complaint under the Prevention of Atrocities Act against Mr Shenoy, alleging that the company was being harassed wrongfully. Acting on Mr Shenoy's complaint, in August 2010 the court issued summons to 11 people from the management of Shivalik Ventures, the Nallasopara Municipal Corporation, having found prima facie evidence against them.

Mr Shenoy was arrested on Saturday in relation to this 2008 case, for which the police have failed to come up with any evidence. "We would also like to point out that there are hundreds of cases of atrocities against Dalits and adivasis across Maharashtra by the land mafia. It is against such people that the Atrocities Act should actually be used," said NAPM spokesperson Santosh Daundkar.

"Meanwhile, we are trying to get him bail", Mr Daundkar said. "We will definitely go forward with a petition. But whether or not a formal protest will be launched will be decided only after Mr Shenoy is released."

Mr Shenoy is currently in a police lock-up at Vasaigaon Police Station.



nagesh kini

5 years ago

Mr. Shenoy's arrrest makes a mockery of the RTI and the need for the immediate bringing in of the Whitsleblower Protection. All right thinking RTI activists ought to bail Mr. Shenoy. Right away.

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