Friday, June 13, 2008

Chinese inflation

Stephen Roaach is worried about inflation in China even as another FT article points out that there inflation is down month on month. Reading the whole article (to its credit, even the headline kibbitzs) leaves one a little more skeptical though, for a few reasons:
  1. Umm ... why exactly should we believe these statistics? Nobody believes them in Argentina, and they're right not to. There's even suggestions that the government manipulates this stuff in the US (partially true I think, but somewhat overblown). It was funny to read the Q&A sections the FT published about the individual BRIC economies. Russia was actually the most interesting market -- strong domestic demand growth, low valuations (10 times earnings), a floating currency, and a tremendously educated populace -- and yet all the questions were about whether it was pure Ruskie hyperbole, whether in fact that whole thing was totally corrupt and manipulated. Strangely, people didn't have the same skepticism with China or Brazil.
  2. The article goes on to point out that inflation is partly (maybe mostly) being tackled through price controls. This of course cannot possibly work in the long run, because it simply leads to shortages, which are apparently already occurring.
Chinese petrol and diesel prices, set by the state, have not increased since last November and energy rates are also capped despite rising coal prices. The result has been growing shortages of diesel at petrol stations and serious coal shortages at some power plants.

In the first week of June, Shandong and Shanxi provinces announced new controls on coal prices, to relieve the burden on power producers. Although there is little agreement on timing, the government is expected to raise oil and energy prices at some stage in the year.

There have also been reports of local government limits on prices of some foodstuffs, including milk and cooking oil. Yet even with these controls, separate figures released this week showed factory-gate inflation had edged up last month to 8.2 per cent, a four year-high.

Of course, they go on to point out that maybe this won't have a big impact on consumers because companies will absorb it as a hit to margins. That's fine, but not precisely the cure for inflation that an investor is looking to hear.

Somehow, the official figures don't give me a lot of comfort.

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