China Tells

Whether China economy has a risk of inflation/deflation is debatable. The inflation camp cites the fact that banks in China have printed large amount of money and channeled the liquidity into the market at a record pace especially during the first half of 2009 (See Graph from Chinatells). Such a scale of money supply will take effect in pushing up the price of everything sooner or later, maybe not now, but definitely in the forseeable future. In addition, it seems that the CPI/PPI are already starting to react towards a positive direction (See Graph from Chinatells). On top of such headline figure, the housing market in Beijing and Shanghai is already showing a sign of frenze and bubbles. Based on the theory of Monetarists, inflation is a money phenomenon and with excessive supply of money, the headline reading will go up sooner or later, with the velocity of money circulated in the society ticking up.

Life would be easy if it is that simple. There are a few points to argue against the above conclusion. First the M2 growth looks high on the headline number, but it does not necessarily mean the supply of money for investment/speculation is growing at the same pace. In fact, due to the risk averse nature during economic downturn, large amounts of that money growth go into household and corporate saving, which are basically dormant in the form of bank deposit. In addition, given the nature of China economy as the world’s biggest manufacturer and leading exporter, the export growth (a proxy of output gap) plays an important role in terms of inflation development. It is observed that every time there is a decrease in export growth, deflation comes hand in hand as there are excessive supply of products which keep the domestic price low. In the last ten years China has experienced three times of deflation: 98/99 around Asia Financial Crisis, 00/01 after the burst of Tech bubble, and 08/09 after the financial crisis. All deflations come with a severe downturn in export growth. Therefore unless there is good reason to believe that China’s export will rebound strongly in 2010, which is highly dependent on the economic performance of USA and EU, the headline CPI is unlikely to go beyond any big number following above logic.

通胀还是通缩，这一直是一个学术界争论不休的问题。通胀派有很多理由相信价格上涨不可避免，比如银行天量放贷，消费者物价指数开始正向上升，以及房价出现泡沫迹象。但另外一方面，通缩派也言之凿凿理由充分。比如根据历史对比，中国的通缩和出口增长有很强的相关关系。一般来说，出口不振，库存积压，供给过剩，那么价格很难上升，反而会渐行下降。因此除非欧美经济复苏速度超出预期，并因此带动中国出口大幅增长，否则很难想象10年中国的通胀会再度抬头，最多只是微幅上涨，比如2%-3%。