The Debts of the Lenders: Chinese Policymaker Says Inflationary Talk is Too Premature

Now, even the Chinese are beginning to admit that talk of inflation is a bit premature. However, that has not stopped them from being big buyers at 20 year TIPs auctions (and soon to be 30 year). Plenty of room remains for the Treasury to increase the supply of TIPs although any new issuance has to be balanced against existing bondholders' interests (e.g. downwards pressure on prices). After all, who in their right mind would lend the US government at under 4% for 20+ years w/o expecting a rise in interest rates?

Still, for now, deflation continues to reign over global markets in spite of Chinese officials' attempts to force lending.

Please keep in mind that all figures below are the official Chinese statistics.

15:16, August 05, 2009

With signs of economic recovery, prices are changing. Real estate prices, stock prices, prices of staple agricultural products, industrial raw material prices have recovered to some extent, together with the current sufficient liquidity, people start to worry about there will be inflation during the second half of the year. Vice President Chen Houyi of the Chinese Association of Laws of Economics said that it is too early to talk about inflation right now.

Judging from the overall situation, the general price level in China is relatively stable. In the first half of the year, CPI fell 1.1%, PPI fell 5.9%. In June, CPI fell 1.7%. This shows that the current prices are still at a relatively low level.

At present, price levels are in recovery. This is to cover the large decline of prices over the past two years. Generally speaking, when CPI hits 3% there is an inflation warning. According to a study by Chinese Association of Laws of Economics, only when CPI reaches 4.5 percent can we say inflation is on the way. So now it is not realistic to predict signs of inflation. Quite the contrary, at present we need to be on guard against the risk of deflation to a certain extent.

Rich liquidity certainly paved the way for inflation. By the end of June, the balance of broad money supply (M2) reached 56.9 trillion yuan, up by 28.5 percent; balance of narrow money supply (M1) hit 19.3 trillion yuan, an increase of 24.8%; balance of the amount of currency in circulation (M0) reached 3.4 trillion yuan, an increase of 11.5%.

Balance of RMB loans of financial institutions hit 37.7 trillion yuan, up by more than 4.9 trillion yuan. Data shows that from January to June this year, banking institutions invested 7.37 trillion yuan in new loans.

Judging by the gap between M2, the indicator of excess liquidity and nominal GDP growth rate, the current liquidity situation is at its most relaxed state in a decade.

At present, when liquidity shrinks, lots of projects started in the first six months of this year will face funding difficulties, so the monetary policy will have to maintain a moderate easing state to a certain degree.

Therefore, it is too early to talk about inflation, while to guard against inflation is taking precautions before it is too late.

By People's Daily Online