Here’s an oxymoron.
The world worries that rampant Chinese demand for commodities is pushing prices higher.
Except, according to Reuters, China’s deputy central bank governor, Su Ning, worries that global commodity prices will push Chinese prices higher, not domestic sources.
Or , as he put it to reporters on the sidelines of the annual session of China’s parliament on Friday (our emphasis):
“What the central bank really worries about in this year is the imported inflation, for which we are monitoring international commodity prices closely,” he said.
There’s two things to say about that.
First, how can China be the victim of imported inflation, when many would argue it’s the one responsible for inflating prices in the first place?
Second, does that mean Chinese authorities are underestimating the commodity inflation threat? After all, (in their eyes) there’s China’s excess capacity and weaker than usual industrial activity to consider on the price effect.
You can see the problem. China has been delaying its own M2-fuelled inflation by feeding it through into commodities. When prices for the commodities it really demands, such as food, begin to spike and others stay high, however, an inevitable surge in inflation could take place. On the other hand, if China responds by tightening too much or too early, it could threaten global recovery (mostly via a crash in commodities prices).
In their latest research report, the analysts at Variant Perception argue the former is probably the greater risk — based largely on the expectation that a bubble is being fuelled via negative real interest rates already. As they explained on Friday:
Negative real interest rates are one of the most certain precursors of financial bubbles. Unsurprisingly, Chinese authorities are making small steps to tighten policy. We have flagged that inflation in China will manifest itself in food prices. We are now seeing the beginning of the uptick in inflation that we expected to see.
And here’s the scale of the potential problem:
With that in mind, Variant’s view on China’s current attempt to rein in lending is that it’s nowhere near enough. As they stated:
Most investors have been spooked by the recent hike in the Chinese required reserve ratio. As the following chart shows, the increase has been minimal.
The point they also make is that while the ‘indication’ of tightening might be there, it’s not entirely consistent with what’s really going on on the ground.
Variant notes Chinese banks extended commercial loans at their fourth highest rate ever in January. Meanwhile, the target for loan growth rests at the mid-teen level for this year — an increase they say only constitutes tightening when compared to last year’s frenetic pace:
Which leads VP to conclude:
If the Chinese government were serious about monetary tightening, we would expect to see the Yuan revalued. It is our base case that we will see very little tightening of policy in China this year, and we believe that the currency is the factor to watch more than any change in the required reserve ratio.
Related links:
Refinery slowdown, China edition – FT Alphaville
Chinese bubbles, ghost towns edition – FT Alphaville
What really drove Chinese commodity imports? – FT Alphaville