From “Comments on China’s inflation and macro outlook,” by Jing Ulrich, chairman of China equities, JPMorgan Securities, February 19:
China’s CPI leapt 7.1% in January from a year earlier, the highest rate of inflation since December 1996 … We believe the introduction of food price controls in January can only be a temporary measure, and would give rise to problems over an extended period. The existence of price controls in China’s fuel and power industries have contributed to recent shortages … With the US possibly entering a recession and growth slowing in Europe, China’s export growth is expected to decline this year, which could have a negative knock-on effect on investment spending. China will likely be prepared to switch course to a stimulative policy if the external downturn takes a greater-than-expected toll on China’s growth.
From “China faces twin challenges,” by Daniel Melser and Ruth Stroppiana, Moody’s Economy.com, February 18:
The US slowdown will crimp China’s export revenues in coming months with the resultant slowing in production and employment growth. This places the country’s policymakers in a quandary: Do they continue to tighten policies and try to kill off inflation or instead pause, or even loosen policy, to address the slowdown in the real economy? Either way, China’s policymakers appear far from the economic magicians that they seemed just a matter of 12 months ago … In fact this period was marked by complacency and the build-up of major imbalances in the economy … Rapid money growth – caused by the failure to adequately address the undervalued exchange rate and huge trade surpluses – [is] the root cause of the current upturn in inflation.
From “Why no one-off revaluation?” by Jonathan Anderson, global emerging markets economist, UBS, February 19:
One of the most common arguments in favor of a large up-front [RMB] revaluation is that China now needs emergency measures to fight inflation. But this argument makes no sense to us. First, there’s no indication whatsoever from the data that current headline inflationary pressures are structural in nature … As of end-December, “core” non-food CPI is perfectly stable; all of the increase in headline CPI in 2007 has come from food, and nearly all of the pressures within food have come from meat and egg prices alone. This is hardly a picture of widespread, spiralling inflation … Second, there’s no rationale behind expectations that renminbi strengthening would help moderate domestic food price increases – for the simple reason that China is not a significant importer of food.