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Goldman Boosts China 2011 CPI Expectations From 1.3% To 4.3%, Sees Many Upcoming Rate Hikes As Fed Inflation Exports Go Ballistic
Yesterday we highlighted that Goldman had closed out its long China trade in anticipation of reactionary measures to what the Beijing politburo decided to telegraph as high inflation (after all there is no such thing as Chinese "economic data": it is whatever the central committee agrees on). The news sparked a fresh wave of selling in the SHCOMP resulting in the biggest two-day selloff for the index in months. Today, Goldman pours more fuel on the fire, by raising its 2011 Chinese CPI expectations from 1.3% to 4.3%, which guarantees that the State Counsil will have to hike rates as it is obvious that the CNYUSD currency peg will not be removed as long as it is being used as a political scapegoat by Washington. Furthermore, ongoing insanity by the Fed guarantees that surging commodity prices will generate even more inflation in China, which in turn will eventually lead to higher prices in the US, leading to greater margin contractions, leading to more layoffs, leading to the need for what the Chairman will see as even more QE, thereby compounding the most virtuous cycle in the global economy that nobody talks about, as more and more money sloshes around the global system, and finds packets of least resistance. However that is a topic for Q1 2011.
In the meantime, here are the key factors that Goldman believes will lead to even higher inflation in China soon:
Domestic factors:
1. The food supply had a temporary shock due to natural disasters. Even though the drought in the spring did not result in major losses in grain production, the summer flood has destroyed the vegetable supply in a wide range of areas in August. Given there is little room for vegetable demand to shift to any substitutes in the short term, the supply shock has sent vegetable prices to new highs. Subsequently, the vegetable price inflation was further prolonged as it took longer for farmers to restore the land, grow and harvest another round of
vegetables in the fall.
2. The policy-induced growth slowdown was too uneven and brief to mitigate the inflationary pressures. Since the growth slowdown in 2Q2010 was induced by policy tightening focusing on the property sector and infrastructure investment (through tightened credit control on UDIC borrowing), the impact was concentrated in upstream industrial sectors, with little spillover to mid and downstream sectors or the service sector. In addition, business confidence was soon restored in the upstream sector, after seeing property construction activities continue to expand in almost full force (notwithstanding the residential property sales slowdown), and the National Development and Reform Commission (NDRC) loosened the investment policies in July (see China: Light at the end of the tunnel, Asia Economics Analyst 10/17, September 16, 2010). The bottom line is, compared to a more entrenched and widespread slowdown in a normal business cycle, the soft patch we saw in growth induced by policy tightening earlier this year had a smaller and shallower impact on the output gap and thus inflation afterwards.
3. We still find limited impact of labor cost increases on inflation. While many observers claim the deterioration in demographic structure have caused higher wage inflation to push up prices, we believe the productivity increase still offers a buffer to labor cost increase in the manufacturing sector so far (see Higher wages have not led to higher inflation and, so far, have not impaired China’s international Competitiveness, Asia Economic Analyst 10/15, August 5, 2010). The most recent industrial profit data also suggests labor compensation growth has not outpaced profit or output growth up until August 2010. However, we will continue to monitor the wage and productivity trends and their impact on inflation and present our findings in the future.
International factors:
1. The CNY depreciated in trade-weighted terms. Despite the nominal appreciation against the USD since last June, the CNY has depreciated 7.2% in nominal effective exchange rate (NEER) terms on the back of broad USD weakness in July–October. Nonetheless, we believe the impact of the NEER depreciation is probably limited, given the small share of imports in the CPI basket.
2. In addition, commodity prices rose on the back of USD weakness and global demand stabilization. While part of the commodity price increases can be explained away by USD weakness, most of price changes have outpaced the USD decline and contributed to rising PPI inflation in China.
3. Quantitative easing has fueled expectation of rising capital inflows and higher inflation recently. Although the excess reserve ratio in the domestic banking system suggests the level of excess liquidity is perhaps still moderate in the monetary system (large banks’ excess reserve ratio was at 1.8% at the end of October, compared to close to 3% in 2007), the expectation of more hot money inflows to push up inflation have been on the rise, as the Fed’s quantitative easing plan was telegraphed and publicly announced in the past 2–3 months.
So once inflation starts to be pervasive, what monetary and fiscal measures does China have to combat the Fed's monetary insanity - a few, but all are futile.
Monetary policy measures: We see increasing probability for the monetary policy stance to be shifted from “moderately loose” to “stable” on the Central Economic Working Conference to be held in mid December.
- Reserve requirement ratio (RRR) hikes and other liquidity absorption measures: the monetary authority will likely rely on more RRR hikes and central bank note issuance to mop up the excess liquidity in the monetary system. In particular, if CPI inflation moves up further in November, which looks increasingly likely now given the ever-rising agricultural good wholesale prices in the past 1.5 weeks, the government will likely hike the RRR for one more time before the end of the year.
- Interest rate hikes: we maintain the view that the State Council will be more cautious in raising the policy interest rates, although real interest rates have been negative. We expect up to 3 hikes next year, each by 25 bp symmetrically in 1-year deposit and lending rates. We cannot rule out that the authorities may choose to frontload one rate hike into 4Q2010, if inflation surprised on the upside significantly in November. But we believe they will more likely choose to hike the RRR so as to avoid strengthening the expectation of a series of hikes that would attract capital inflows.
- Credit control: So far, the credit quota seems to be only loosely managed, which caused the surge in broad money supply in August–October. We expect the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) to collaborate and intensify the window guidance soon, as well as planning for a relatively conservative credit target for 2011. In contrast to a common belief that the 2011 target of newly increased loans should stay around Rmb7.5 trillion, we think the monetary authorities will likely try to reduce the target from the current-year level at least moderately to express a hawkish bias. Since the quota will be further adjusted down the road, policy makers’ decision (especially if publicly announced) will have a signaling impact in the near term.
- Exchange rate appreciation: While there is a good case to be made to appreciate the currency faster, especially given the broad USD weakness, we continue to expect policy makers to keep the pace of CNY/USD appreciation at approximately 6% per annum. This is because the Chinese government remains concerned about the consequence of exchange rate appreciation on external sector employment as well as hot money inflows.
Fiscal and investment policies: Although the government may maintain its “proactive” fiscal policy stance in 2011, we suspect it will slow down expenditure growth in the face of rising inflationary pressure. In particular, if the proposed budget fiscal deficits decline both in absolute levels and as a share of GDP, it will signal a shift in the actual stance of fiscal policy from expansionary to tightening. So far, fixed asset investment growth has remained firm, without significant overheating signs. However, should such evidence present itself, the government will likely move to curb lending as well as postponing approvals of investment projects.
...
Again, none of this will have any effect at curbing what is becoming the biggest Fed-blown emerging market bubble in history. And with China giving up on the plan to grow its domestic consumption strategy as exports once again rule the world, the Fed's plan of exporting inflation indefinitely will soon massively backfire.
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"Virtuous cycle"
The road to hell is paved with benevolent intentions.
Some idiots actually believe we can print our way to prosperity.
Yea and too bad they have complete and total unquestionable control. Hey its only billions of lives at stake depending on how their insane experiment goes.
How the hell did GS ever have CPI expectations at 1.3% for China???? The notion is absurd
Maybe they missed the ChiCom memo stating the agreed upon lie?
+1
Most of us here now have known for years that inflation in China is nothing like what is published.
Anyone this minimal Austrian will provide Wen Dibao with the keys of the various Potemkine villages of China statistics.
What GS is managing is anything except the truth. Probably something more like expectations of "inflation expectations".
By the way I still wonder why this site still provides GS-infused information. I read the ZH despite this kind of post. That shows how much we value Tyler:)
I wonder how high up GS has it's men in the Chinese Central Bank or in general the China's government? What info are they privy to?
it's more likely the other way around. when you have a party of 77 million members at your disposal, strategically placing certain members in specific roles to "keep tabs" is usually done in the best interest of the party and not the other way around. they disguise this by doing "joint ventures" with MNC partners, but in reality they want to just have moles within organizations to report back on progress and how to potentially do whatever it is the lao wai ren (foreigners) do, but better. know of plenty of JVs where most senior officials of the newly formed China-based organization tends to be Chinese appointed there by the Chinese partner.
on a related China banking note, I go on this site at least twice a week to simply see what's out there and what banks are hiring etc here in Shanghai. Most of the time its search firms, head hunters, JPM, MS, standard charter posting jobs, but today a FLOOD of newly posted jobs from Chinese banks, Chinese stock exchanges, Chinese boutiques and Chinese regulators crossed. I have NEVER seen this many posting from domestic financial services firms on this site on one day. Maybe 2-3 at most, but over 30?? something is going on here.....
http://jobs.efinancialcareers.com.au/China-Shanghai.htm
The inflation in India should provide a clue for what China is dealing with ...
http://www.bloomberg.com/apps/quote?ticker=FAOFOODI:IND
In his office above a room stacked with jute sacks of turmeric, many streaked yellow by the powder, Deepak Shah is extolling the virtues of the spice.
“It’s very good for health, it’s used in cooking, in cosmetics and it’s medicinal,” said Shah, owner of P. Amratlal & Sons, a trader at Mumbai’s wholesale Vashi market.
Falling stockpiles and speculation have also pushed up the price of the curry ingredient 64 percent this year on the National Commodity & Derivatives Exchange, three times the gain of India’s benchmark stock index, boosting food costs in a country where 7 out of 10 people live on less than $2 a day.
Reserve Bank Governor Duvvuri Subbarao raised interest rates six times this year and said on Nov. 3 inflation is still above the bank’s comfort zone. One reason is the spices Indians use every day. Pepper futures have risen 51 percent on the National Commodity & Derivatives Exchange this year, compared with a 20 percent jump in the Bombay Stock Exchange Sensitive Index, the best performer among the world’s 10 biggest equity benchmarks.
India Inflation ~
Egg, meat and fish prices are up 29% from last year, while prices of milk and fruits also rose about 20%.
"The current price rise is more due to seasonal demand. We will see food prices resume their moderating trend from the next data as the festival demand is now over," said N.R. Bhanumurthy, an economist at government-run think tank, the National Institute of Public Finance and Policy.
However, they aren't expected to come down substantially, as global commodity prices are firming, he added.
The government had hoped heavy rainfall this year would boost farm output and cool food prices sharply. While food inflation has come off its high of more than 20% in December, it is still hovering at painfully high levels that could be an obstacle to sustaining rapid economic growth.
High inflation prompted the Reserve Bank Of India to raise its lending and borrowing rates by 0.25 percentage point each on Nov. 2, the sixth hike since March. Many economists expect the central bank could pause the policy tightening as it waits for its past actions to take effect before it chalks out more monetary moves to control inflation. The government will release the October inflation data Monday.
http://online.wsj.com/article/SB1000142405274870384820457560792007259218...
Brick wall approaching fast, what do we do! Step on the damn gas, Buckaroo Banzai!!
Hey SheepDog,
It's a BRIC wall actually.
And it is falling.
Humpty, Dumpty and wall, all fall!
Never, ever to be put back together again.
ORI
http://aadivaahan.wordpress.com
The lies that the public will soon have to live with :
Washington is run by Corporatists
Inflation Steals wealth
The Fed is working for the Fed
QE1 was to bail out banks QE2 is to make sure they survive and you dont
And the BIGGEST LIE most Americans won't be able to ignore and really blow their minds LADY GAGA IS ACTUALLY A MAN
Dingaling,
Washington is run by salesmen
QE2 isn't directed at the banks
Lady Gaga is most definitely female (her name is Stephanie).
Washington is run by salesmen... with Law degrees. Subtle difference.
QE2 does benefit primary dealers... which are some of the biggest banks in the world. The Fed doesn't participate directly in Treasury auctions... and those bastard PD's make a nice little spread from a buyer who doesn't mind overpaying.
And banks are still being paid interest on those massive reserves... okay, that's NOT a part of QE2, but an ongoing $20 billion or so subsidy to the irresponsible.
Lady Gaga wants to be Freddie Mercury... so I'm a little confused on the issue.
Thank you Assetman - I'd say I have your back to, but that avatar scares the shit out of me .
Everyone notice since the 'airplane contrail' we havent had a single market pump day since? I guess Bernanke DID get the message!
The message wasn't directed at Bernanke. It was intended to be a new revelation for the double-rainbow guy.
Double Complete RAINBOW! Great Clip.
Oooooh... I LOVE that Double Rainbow Guy!
Here come the great Michigan numbers, the Federal Reserve and Ben Bernanke saved us all, market index will zoom up. I say we close near 11350 on the Dow today. These little dips will keep being bought till it stops working.
yep
Beyond ironical.
With nothing left to export, except cheap porn and other fluff, the US, mighty bastion of the free market universe exports it's inflation.
Strange and getting stranger by the minute.
Indian's still riot when pissed off enough about rises in prices (especially of onions for some reason).
Let us see how imported inflation (we were doing well inflating ourselves by ourselves as it were) works here.
CPI also stands for the Communist Party of India.
Rationed existence anyone?
ORI
http://aadivaahan.wordpress.com
A definite decoupling of pro-US sentiment
WSJ- 'Obama Humiliated at G20, Trade Setbacks' lol
And one wonders why Obama and Bernanke are being humiliated at the G20... LOL!
Chart: ES and ZB
Fuck Goldman. Fuck POMO.
http://99ercharts.blogspot.com/2010/11/es-zb_12.html
http://www.zerohedge.com/forum/99er-charts
The Korean war has never officially ended.
As history recalls the US and UN forces were on the verge of an early victory when the Chinese intervened. The intervention in hindsight was well telegraphed but horribly misread.
The Chinese used Human Waves, hurling soldier after untrained soldier at the US lines. On the periphery, battle hardened PLA troops harassed the US lines causing the US to retreat and then forcing a stalemate.
The G-20 meeting in Seoul was a perfect site for the Chinese to face the Dollar Waves that the FED is now printing at them. Do rumors of more rate hikes signal a retreat?
Chinese inflation is guaranteed to be much higher than offcial figures. One thing about the Chinese authorities. They will never tell you how bad something is and always overstate how good something is. Been watching Chinese news and tv for a decade and the Govt line on something is almost always some sort of bs.
Gee, that picture resembles that of the US government statistics and estimates. Are we teaching or learning?
One good thing about the USA is that you can call bs on govt bs and not dissapear for a decade into some jail.
anyone watching $TRIN today ...? i swear it looks like one of those charts nanex came up with. its bouncing rather violently betwixt .5 and .9 or so. really weird.
The great biflationary squeeze continues and expands!
<Snark on>What a great time for consumers, small business and those on fixed incomes!</Snark off>
Only now I no longer believe that the Great Biflation is just an unexpected side-effect of misguided, wrongheaded and dogmatic economic policies.
Now it's becoming clear that Tyler was right: our worst dystopian nightmares of "The Greatest Theft in History" are becoming more clear, more incontrovertible and even obvious. Why else would there be a QE2 in place but to reduce income to the millions of fixed income investors, while raising the cost of homeownership, the cost of doing business and the cost of a middle class existence in America?
Answer: a transfer of wealth from those on fixed incomes (millions of retiring baby boomers), the current productive middle class and the upcoming generation of Americans to the International Brotherhood of Banksters and other sub-species of TPTB.
silver's droppin!!! who's catchin the falling silver knife??
if it keep crashing for a week I will load up some more...
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