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The Chinese Domino Has Fallen... Or Has It? And Why No Power, May Really Mean No (Inflationary) Problem
Earlier today SocGen came out with a report that is a must read for everyone who has an even passing fancy in global monetary policy, as the currently rampant inflation in China, and the approaches ushered to deal with it, threatens to derail the global "recovery" (although not sure in what: printing of credit money - yes; economy - no) which according to Morgan Stanley is "too young to fail." To be sure, SocGen discusses the first of three dominoes that will or already have, fallen, as part of the increasingly popular domino theory of Chinese inflation. SocGen explains: "Quite simply, the domino theory of 2011 is that when China comes under the influence of inflation, the surrounding countries, those with the most immediate trade ties, would also fall to inflation. It will only be a matter of time till those economies with the greatest trade ties; indeed the entire world has succumbed to the great inflation cascade emanating from China." And the first domino, which SocGen claims to already have fallen is the following: "The first domino is China creating autonomous structural inflation: China’s domestic inflation accelerated at an unprecedented pace at the end of 2010 and policy makers remain well behind the curve. As China engineers its economy to a more domestically focused one, its demand curve is shifting outwards and the global supply curve has been inelastic in response. That domino has already fallen and is the focus of this paper." And while we respect SocGen's opinion on China, most recently referenced to debunk a BCG report on imminent US-Chinese worker wage parity, in this case we wonder if SocGen has simply gotten on the boat of conventional wisdom a little too fast. What we mean is that "structural" inflation may not be all that "structural"especially if one considers a flip to a traditional Stalin saying: "no man - no problem".... in this case "no electricity - no inflation." Bernstein's Michael Parker explains...
As Bernstein's Michael W. Parker and Alex Leung report in Blame it on the Rain, "As constant media reports are pointing out, China is going to be "short 30GW" of power this summer and power cuts may be as severe as they have been "at any time since 2004". The threat to China's manufacturing heartland is clear." This is in the context of recent speculation that due to record drought, Chinese power production may suffer. And while the authors argue whether or not there truly is a drought induced electricity shortage, they look at something different: whether or not not hiking electricity prices, and the power shortages that would result, are not the natural best way to cool the economy: not monetary policy, not price controls: electricty.
To wit:
Notwithstanding discussion of China being "30GW short" of power and the comparisons to power shortages in 2004, the current power shortage problem can't really be explained in terms of GWs. Broadly speaking, power shortages are a function of one of two things: lack of power stations or a lack of money to buy the fuel to run the power stations. In 2004, the problem was a lack of power stations (and, to a lesser extent, transmission capacity). Today, the problem is a lack of money....when thermal utilization for the year is north of 66%, there is almost guaranteed to be no spare capacity at 3pm on a Tuesday in August. No spare capacity means the lights go out, as happened in 2004. Today, there are plenty of power stations in China so more power stations will not solve the problem as the problem is not a lack of gigawatts. It's the price of coal.
Coal prices are set by the market and are currently high. Electricity prices are set by the NDRC and have hardly increased with the run-up in coal prices since 2009. Accordingly, most coal-fired power stations are losing money if they are sourcing coal from the spot market. The economically rational decision is therefore not to generate electricity. But this creates power shortages...
Simply put, power price increases are inflationary and the Chinese government is currently focused on lowering inflation. Accordingly, a nationwide power price increase to alleviate the problem is not likely. Letting the current stand-off run its course – in the worst case scenario, allowing electricity shortages and the high price of fuel substitutes to force factories to shut down - would slow the economy. And that's the key point in our view: increasing electricity prices is inflationary while holding prices steady would achieve the NDRC's current economic goals. If those are the options, why would the NDRC increase tariffs right now?
And, unlike 2004, a little power shortage may be just what the Chinese economy needs right now. The threat of an economic slowdown in China simply isn't what it used to be. As Fan Jianping, chief economist at the State Information Center (an NDRC think-tank) commented this week in reference to slowing economic growth: "It should be a good thing. In the short term, a slowing economy provides favorable conditions for a price drop… in the long run, it helps restructure the economy."
Perhaps China knows all too well, that while the entire world is focused on its "structural" inflationary problem which is already taken for granted, as most look at Chinese inflation from the lens of its place of origination, the US, it actually holds the key to its own salvation, and that is simply to turn the power off (or run out as the case may be). No power - no running machines - no output - no wage growth - no product and service scarcity - no inflation. (with the added bonus that there is no way for people to communicate by thefacebook and plot the overthrow of the government). And there goes the entire problem: and not in a delayed fashion through money velocity and credit availability, but literally overnight. Like flipping a switch.
Incidentally, there was not one mention of the word electricity in the SocGen report. Which may ultimately very well end up being right, although that would likely be one of the first times when conventional wisdom actually ended up being correct.
Anyway, for those who wish to read why, in SocGen's opinion, the Domino has fallen, read below.
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Clever.
The power problem is why China is still full speed ahead on nuclear power, despite the events at Fukushima.
Few things scare me as much as the idea of the Chinese building nuclear power plants in a hurry.
It's interesting to note that before the 9 magnitude earthquake, Fukushima wasn't on anyone's radar. Now it's the buzzword that scares you and is incorporated into your name.
Politics...
That's funny, I was just thinking the same thing about Canuckles!
Youe were just thinking "It's interesting to note that before the 9 magnitude earthquake, Canuckles wasn't on anyone's radar. Now it's the buzzword that scares you and is incorporated into your name".
Politics...
Alrighty then. Maybe one should type more and stop being so defensive... Whats in a name
there be no shelter here
No, I was thinking that Canucklehead must be scared of Canukles, so chose the name Canucklehead.
But I have no idea what a Canuckle is. It seems you do know? Should I be scared of them? Should I have been Canuckle Sam?
What is in a name? Would Canuckle Sam smell as sweet?
What's in a name? Not nearly as much as what's in your bra...
Producing shortages to reduce prices. I knew I should have taken economics in college.
Thorium, bitchez!
THIS is why I read ZeroHedge
Agreed.
So, once again, bad news is good news.
We are very fortunate to have such luck. Otherwise we'd just be fucked, like in the old days when normality ruled.
Economy to "young" to fail? It hasn't even started, wouldn't that make it aborting the recovery?
According to some believers, a recovery begins at conception...:>D
Bullish for the Domino producing companies. So many Dominos lately...
Broadly speaking, power shortages are a function of one of two things: lack of power stations or a lack of money to buy the fuel to run the power stations...
Broadly speaking? Egad that is the moist simplistic inaccurate thing I have ever read. Jebus shooting holes in that statement is a waste of time.
I agree, drier is better.
Lack of money and China should never be in the same sentence.
...except for that one time, right then...
China STILL employs thousands of pick and shovel guys to move tons of earth, what did China do BEFORE Electricity? I foresee massive hamster wheels with hundreds of "hamsters" taking the place of 3-phase motors...
Simply UNINVENT Electricity! And Go back to DARK ages of slow Industrial Growth
NEXT HEADLINE: China blames low Q2 Exports on too much electricity.
Fascinating article. I suspect this plays into a manipulated price hike in oil in order to leverage China and hit them a bit while they are down a la Russia in the 80s -- while there won't be Glasnost-scale consequences -- more at a blowback (think US Treasury Bond sell-off retaliation move) -- there will certainly be global grief when said energy price spikes force the Chinese hand.......
Umm... cutting out the power is an adverse SUPPLY shock. That causes prices to go UP. Factories aren't running, but people still want the final goods = higher marginal willingness to pay (albeit for a reduced quantity). Sure would slow their economy down, though... that part is accurate.
To be fair, in general equilibrium you'd eventually have massive unemployment, reduced labor income, and deflation for some domestically consumed products. That, I'm sure, is just what the Chinese want -- lots of unemployed people trying to purchase expensive food.
China STILL employs thousands of pick and shovel guys to move tons of earth, what did China do BEFORE Electricity? I foresee massive hamster wheels with hundreds of "hamsters" taking the place of 3-phase motors...
Somewhere, a law of thermodynamics will kick in.
Ok I am going long on dominos and can I get diet coke with that?
I'm not up on a Keynesian witchcraft inflationary/utilization/capacity garbage, but here's a shot. If you allow the price of electricity to go up, capacity will be supplied but it will cost more to consume it and your production costs will go up. This increase in price to consume electricity will cause your demand for electricity to decrease. It's like price is its own rationing method. Incredible how that works.
But if you don't allow the price to increase for electricity, you will create a shortage. A shortage in electricity will cause fewer things to be manufactured in China. This will lead to a decrease the supply of Chinese manufactured goods. This decrease in supply makes the goods more scarce, sending the price of those goods higher.
So in the logic of "don't raise electricity prices because that causes inflation", you instead create a shortage of electricity which in turn causes the manufactured goods to become more scarce which drives up their price. As the US learned in the 1970s (well those who would actually be embarrassed by the term "Keynesian"), wage and price controls exacerbate the problem of too much money chasing too few goods. Increasing the price of electricity does not cause the price of the end-use products in the economy to go up. Cost does not equal price.
what happened to US exports of inflation to china?
i know! there is a lotta ink abt china having a wage-price type inflation spiral, not a fiat fire-sale type inflation, so it won't be the FED's fault? yes, china has increased wages. no, slewie doesn't see chinese inflation as wage-price.
chairsatan is to blame! lol!
if china wants to keep its money pegged to ours for trade purposes, no matter what, they are gonna pay more for coal. and everything else they import, one would think. more coal---especially if their hydro-electric rain-power isn't adhering to the 5-year plan for rainfall behind new dams. so it is not just inflation, but also rain-induced, chinese demand.
tell that to the chinese.
they want to protect their mfg, so the squeeze is on! luckily, NDRC always knows best! just like chairsatan!
Well said.
There is also the US inflation exported to all of China's neighbors who have pegged their currency to the dollar, or consume a lot of dollar denominated commodities.
Apply an equal force to both sides of a domino and it doesn't go anywhere.
Everyone is overestimating the cleverness of the Chinese government, IMO. They see that more inflation = higher probability of government overthrown by the rioting masses. Hence, keep electricity, diesel, and food prices stable through price controls. Done. However, governments (with no exception that I can think of) rarely think past stage 1. Stage 2 (gov. overthrown by rioting masses due to widespread shortages due to price controls) is not on their radar.
Soc Gen -- (hyper)inflation in China is ongoing, more a matter of F/X flows and a large 'shadow banking' system in China. The PBOC does not have control over the yuan, as the Fed does not have control over the dollar.
- The 'inflation- export' thesis is too easy. Those countries with flexible labor rates (that means rates that rise) will experience inflation. The rest ... no mon, no fun!
- Remember, high prices are not inflationary by themselves. They are simply high prices.
- China power thesis is also too simple. What is the power used for? To power vacant apartments or duplicate factories? If electricity consumers cannot have grid power they buy diesel generators (there is diesel fuel shortage as well as a coal shortage).
China is facing energy limits (along with the rest of the world). What happens? Prices rise to the point where demand is destroyed, causing prices to crash.
@steve from virginia
You do not post often enough.
Well, did you "see" his tiny arms? Can ya blame him?
Why don't the Chinese motherfuckers just stop using the nation's surplus to buy and support an outsized position in US treasury bonds, and instead, use those resources to buy coal for their power plants? Either domestically, or abroad?
Problem solved.
I had the same thought. Where would China buy the coal from? Maybe the US? Takes some of the strain off the trade deficit, eases tension on the US$, and as more Chinese demand the consumer goods that the US has been loading up on for the last ten years, more of their production will be for the domestic market, not export, also reducing trade deficits.
As for water - we've got severe flooding in four different Canadian provinces. Maybe we can send them of ours.
The takeaway from this story is buy nuclear - etf's, producers, etc. They are still down 25% post-Fukushima. talk about a frickin' layup!
I think maybe they are better on the master builder double proposition "dilemma" we wish to appraise. Surplus coal heats freezing souls later in a economy overheating later. Anyway slewie was spot on with natural economy we must deal with as reality not graphs for speculation.
In the summer of 2006 the $/CNY was trading at Rmb8.0. It then followed a 45 degree angle fall and levelled out around 6.85 in mid-2008. The fall resumed in mid-2010 and it is now trading at Rmb6.4920. So the total drop is around 20% since 2006 and the latest leg is 5.2%. Nothing spectacular, nothing dramatic, but it is remorseless. Anyone sitting in Renminbi can feel extremely comfortable. Whatever problems China might have, its currency is certainly not one of them; and hard currency countries always survive best.
That is one of the best "spins" I have heard in a very long time.
China has substantial capital investment, not only in the power plants but in the manufacturing facilities. These facilities will be idle due to the lack of power from the grid. This is economic suicide.
Most of the manufactured goods produced are sold overseas, the increased final production cost due to the increase cost of coal should just be added to the sale price... the "inflation issue" is something that should be "sent overseas"... with the finished goods.
That is where the problem is. Hmmm, marginal compression???
Maybe the real issue is the oversea market and their inability to purchase more expensive products.
Lots of capital malinvested. Wonder what this will do to their GDP when the real bottom line numbers come home to roost?
The real ugly stuff will come with food storages due to the drought.
China is not as rich or strong as many think.
Good points, especially the relative strength of China.
Command economies break down over all sorts of silly and unpredictable imbalances.
Looks to me like this is where the inflation comes slinging back to US. No?
Kinda like this: http://www.chaobell.net/newgallery/v/macrodump/gifs/rake.gif.html
Jesus Kryst this is boring...i just wanna lay naked in sunny grass, tan my balls and sip an ice-cool beer...
Fuck coal & fuku & SocGen & China & the "eCONomy" & all this insaneness...just make sure you have some gold and silver, close friends, tanned balls and a placid mind then drop the fuck out and forget about the whole show. It aint worth your precious time unless you're a fucking materialist trader.
The whole shabang is really becoming insane and the more people accept this is "the new normal" the more it will be. Be careful with what you think, say and wish for.
"My balls are tanned as hell and i'm not gonna take it anymore!"
So let me see if I get this. Turn off the power. No production. No wage inflation because no jobs. Perfect, simply implode the economy. Problem solved. And we can all go back to working The Bernank's massive land holdings by hand the way it was done in the good ole' days.
This is exactly why people are trying to get off the grid.
Oh, and I just had to add:
The two ads presented to me with story (one on either side) were for Chinese dating services. Are young Chinese women their next great export?
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