Chinese inflation and economic output surges as does the fiscal deficit of the United States

Over the weekend we saw some considerable developments in the inflation picture for China. Those who have followed my articles on this subject from the 1st of December and the 11th of November will be aware that inflation in China has recently been on an upward trend leading to fears of over-heating in an economy where the rate of economic growth this year has in percentage terms often been in double-digits. On Saturday we learned that Chinese Consumer Price Index had risen 5.1% on an annual basis in November. If this as an absolute level was not bad enough we can see that this contributes to a picture of quite an acceleration as at the opening of this year the rate was only 1.9%. Added to them came news on producer prices which showed an acceleration to an annual rate of 6.1%. Both outcomes were higher than economists had expected with producer price outcome particularly exceeding what they had thought.

If we look at a breakdown of the consumer price figures we see that Chinese food prices rose by 11.7% in November. As this is something that the People’s Republic of China had already suggested was a problem one might have expected an immediate policy response. However this is China and the policy response came before the figures with there being an announcement on Friday that commercial banks reserve requirements will be increased by a further 0.5% in an attempt to control money supply growth and hence inflation making the sixth such move this year and raising the requirement to 19% for China’s biggest banks . Unfortunately economic experience suggests that such measures are unlikely to be able to help much and accordingly sooner or later China is likely to have to raise her interest rates. Her leadership has previously suggested that such rises will be delayed until 2011 and seeing as there has been no rise so far today it is likely we will have to take them at their word.

Market Response

So far in terms of equity markets it has been very favourable and I would imagine this has mostly been driven by the lack of an interest-rate response from China to these figures. The Shanghai Composite equity index which has been on a poor run of late has rallied nearly 3% to 2923 in relief. European equity indices are rallying too apparently not bothered by the fact that the interest rate rise is likely to be deferred not that it will not eventually take place. The Eurofirst 300 equity index is up 0.5% with the UK FTSE 100 up 0.7% to 5857. Perhaps equity markets are simply keen on getting on with their somewhat traditional Christmas rally!

For those in any doubt that China will have to raise her interest-rates then let me give you two more statistics released on Saturday. Her industrial output on an annual basis increased by 13.3% and her level of retail sales increased on an annual basis by 18.7%. If you add the increase in inflation to this then what you have is a textbook case of an economy overheating. Whilst raising bank reserve requirements may help at the margin in the end China will have to raise her interest- rates possibly substantially. Of course such rises may make her currency more attractive and lead us back into the “currency wars” debate which has gone quiet of late. A rising Yuan exchange rate certainly would put the cat amongst the pigeons and is probably the reason why China has not raised her interest rates yet. Whilst she says she wants the Yuan to appreciate in reality she is trying to keeps its appreciation as slow and gradual as possible.


It is quite plain that China’s combination of command economy and capitalism is approaching something of a nexus. It is overheating but she appears to be delaying her policy response leading to the rather curious view that she is behaving like the imperialist capitalist politicians she likes to criticise as that is what they mostly do too! One possible solution of a rise in interest rates would be likely to help the rest of the world because it would be likely to contribute to a rise in the Yuan which would help to reduce global imbalances. So there you have it, we have one more entry in the column entitled official intervention prevents markets responding, and yet another entry where the market response would help the world with its global imbalances.

US Balance of trade figures: an odd divergence between China and the United States

On Friday we saw improved trade figures from the United States with her deficit reducing. Regular readers will know I find such figures to be very unreliable and in the figures was something to prove my point. If you look at the analysis you see that in October the United States had a trade deficit of some US $25.5 billion with China. If you look at the Chinese figures released on Saturday you see that in November China exported some US$26.456 billion worth of goods to the US (you may already be spotting the problem) and imported some US $9.732 billion leading to a trade surplus with the US of US $16.724 billion! So a growing Chinese economy with an improving balance of trade is reporting a smaller trade surplus that what America thinks she has. Now the numbers are for periods one month apart but do we really believe that an overheating and surging Chinese economy only managed to export to America just a little more than America thought the trade deficit with her was a month earlier?

Looking at China’s latest trade statistics had some other interesting viewpoints. Whilst the UK’s deficit is large we do seem to be improving which is hopeful but the real outlier was the Netherlands. In November she exported some US $0.576 billion to China and imported some US $4.8 billion for an enormous relative differential. I will be interested to see if anyone has some thoughts on this.

The Fiscal Deficit of the United States worsens

The US Treasury released information on this on Friday and the figures were troubling. The fiscal year starts on October the first and the fiscal statistics for October had been hopeful leading to hopes for the rest of the year. Unfortunately those for November were considerably worse.  The fiscal deficit was some US $150.4 billion which was not only some ten billion more than October it was 25% higher than the deficit in November 2009. There was another troubling calculation in the numbers as the deficit was in fact higher than the receipts to the US Treasury ( taxes and the like ) which amounted to some US $148.96 billion. So America had to borrow more than her income in November 2010! I wonder what Mr.Micawber would make of that.

Analysing the data leads to the conclusion that tax receipts were quite strong and so the increase had to come from raised public expenditure. Looking at the breakdown increases appeared to come from Defence ( US $10 billion), Health (US $6 billion) and social security (US $4.6 billion). Now this is only one months data and may accordingly be misleading but it gives the impression of a rather profligate US administration. Also in the numbers was an increase in debt interest paid of some US $ 2.78 billion and this will be from the expansion of the US national debt and not yet from the recent rises in the interest rates on it. Of course we do not know if the recent rises in the interest rates on US government debt will be sustained but adding the cost of them to this picture should they be so does not make for happy reading or analysis.

At least the growth in taxes on income reinforces the view that the US economy is growing although the fact that she refunded corporate taxes is less so.


This news comes hot on the heels of the US fiscal stimulus/tax cut package I discussed on the 8th of December. So those in America’s bond market who were troubled by the likely increase in her deficits now have a poor monthly set of deficit figures to worry about as well! The debate is continuing as to the exact size of the tax cut/stimulus package with some now arguing that it is more like US $860 billion than US $ 960 billion. This is a sign of the times in two respects. Firstly that you can have a difference of US $100 billion in what should be a known policy and secondly that we are assailed by such large numbers these days that it is tempting to regard even US $100 billion as being insignificant! Of course it is significant it just feels like it may not be.

The 99’ers

In case you think I am referring to an US football team I am in fact referring to the recipients of US unemployment benefits. In the United States these have a maximum terms of 99 weeks and the increases last week I discussed were increases to the component  parts not the overall longevity which remains 99 weeks. The reason I raise it is if you look back 99 weeks then we are about to enter a period where people who lost their jobs then exhaust their benefits,and as this was a period of high job losses then accordingly many people are about to embark on a grim future which must involve something along the lines of the soup kitchens one sees in films from the 1930s.

If this is not enough of a shameful episode in itself then I look at many of those who contributed to this crisis and often lived very well off so doing and look for any sign of punishment. In the UK we have the case of the former Chief Executive of Royal Bank of Scotland Fred Goodwin whose management led his bank to collapse retiring on a pension which would feed and house many of these people. Not only should he be ashamed of his current circumstances but so should our (toothless) regulator the FSA which only last week found he had no case to answer. I would send those who made such a decision to work in the soup kitchens for a while.

The Euro zone and Ireland

The media is full of new plans from the Euro zone as to what they are going to do about their rescue schemes. Some of these are becoming rather familiar but the continued debate leads me to the conclusion that they have no actual plan beyond hoping that the bond buying by the European Central Bank will come to their rescue. Unfortunately last week government bond yields in Portugal, Spain and Italy all rose and we will find out later today how much money the ECB spent trying to resist such trends.

As for Ireland according to the Irish Independent her banks became even more reliant on the ECB and its sidekick the Irish Central Bank in November as the ECB lent an extra 6 billion Euro’s to the Irish banking system whilst her own central bank lent some ten billion. I have mentioned the use of the Irish central bank’s sudden enthusiasm for such a move before and can only conclude it is two things. One is an attempt to hide the assistance and the other is that this attempt in an era of Wikileaks and so on was about as likely to actually work as one of Inspector Clouseau’s plans!


10 thoughts on “Chinese inflation and economic output surges as does the fiscal deficit of the United States

  1. On a tangent, I see that Charles Bean has added two upside risks to the inflation overshoot in the UK 1) more generalised commodities and tradeable goods inflation driven from global recovery ( or Chinese inflation?) 2) an upward drift on wages and prices due to a rise in inflation expectations. He summarises the MPC discretion to maintain extraordinary policy in this climate
    ” In the light of that outlook, I believe we have made appropriate use of the “constrained discretion” granted to us in the Chancellor’s remit, looking through the temporarily elevated inflation to the medium term in order to avoid unnecessary volatility in output.”

    Problem here is that he now is telling us that “temporary” might now be becoming “general”….. then what?

    • I eat way too much fat,sugar and salt. Luckily I am “looking through this” as I recognise it is because of global imbalances. I expect my diet to become under control once someone else is held to blame for my own weaknesses.

    • >> Problem here is that he now is telling us that “temporary” might now be becoming “general”….. then what? <<

      Then they're in trouble.

      While commodity purchases comprise a relatively small amount of many household budgets here (compared say to emerging market economies), they are nonetheless the prices whose changes people *notice the most*. E.g. Petrol, diesel, energy (gas & electricity) and food, i.e. essential purchases.

      People see commodity (fuel, food) price changes as a direct proxy for their general inflation. Mistakenly, in many cases, but I believe that's how people view commodity price changes.

      So I'd expect further commodity price rises to directly cause people to seek wage material increases, increases which in general would probably be much greater than their personal inflation rate warranted, since their perception would be that prices generally were rising strongly.

      So, I believe there's every possibility for the inflation situation to get way out of hand for the MPC, leaving them in a very awkward position indeed. If they then wish to regain credibility, it'll be regained only at a high cost.

  2. HI Shaun,

    “It is quite plain that China’s combination of command economy and capitalism is approaching something of a nexus. It is overheating but she appears to be delaying her policy response leading to the rather curious view that she is behaving like the imperialist capitalist politicians she likes to criticise as that is what they mostly do too!” Wonderful comparison here, Shaun!

    With regards to the Netherlands seemingly deteriorating balance of trade situation with China; surely that is an inevitable consequence of being within the EU? There is no way that the Netherlands, with their high EU tax and cost overhead, can compete with China in most economic sectors; so it is essentially with all EU countries, although some of the newer entrants have lower costs for a while. The only way in which the West would be able to compete is either to cut its costs to match China’s or to impose fully effective trade barriers?

    • Hi Drf
      I just thought that I would reply on the Netherlands issue. I dont disagree with your points but the numbers were particularly marked for the Netherlands in a ratio that according to the Chinese has been just under 9 for 2010 so far.I took a look at Italy,France and ourselves and our ratios were much much better so it remains curious I think. I did not expect the Netherlands to be in such a position.Maybe Chris’s comment about their being some misreading of deliveries to Rotterdam may help a bit…

  3. Shaun, I admire your sense of morality. It is very sad to see state supported markets making failing managers rich. I think we are in for more rioting as has happened across Europe this year and London last week. If the revolution ever comes I hope someone like yourself should get recommended for governer of the BoE. 😉

  4. The Netherlands trade figures are almost certainly a result of being in the EU: but this is because Rotterdam is the main port for importation (particularly by sea) for much of the EU. I don’t imagine for a minute that all that stuff is being bought by the Dutch.

  5. I want to ask something really simple. It occurs to me the US deficit was a non-issue for a long time. With the reserve currency and largest economy, the Fed has been able to print money with impunity.

    Now the Tea Party and others have put the size of the deficit in the news.
    So Bernanke starts his recent QE2, like he can do this any time he wants. However this time there’s a backlash.

    Then we hear that there was a flight from US Treasury Bonds last week due to “the size of the deficit”. I’ve never heard this before about the US – do you think they are reaching the limit in terms of issuing money?
    The dollar which was crowned Prince after WWII, can they no longer abuse it, and instead must the US adopt a more prudent policy? If so, this has large ramifications – the US has kept capitalism alive during the 20th Century by stimulating – at the expense of the dollar and its deficit figures – when it became necessary.

    You know, the US reminds me of a football club like Real Madrid or Manchester United. They have a couple hundred million debts but never pay it off. Instead they service the debt, because – after all – they are Manchester United. So they can do what they want. With the reserve currency, the US is the same.
    Or are they now finding differently??

    • Hi Lee and welcome to my blog
      The issue of the US deficit and its impact on government bond yields has ebbed and flowed in 2010. It was an issue earlier in the year and yields rose. This was a pattern repeated in the UK and Germany andso on. So if you like the world was worried then. But as the year progressed government bonds rallied and rallied in price terms and yields fell. In late summer then some of the rally was due to expected purchases of US government debt by the Federal Reserve.If we go back to then expectations of QE2 got as high as US $7 trillion with places like Goldman Sachs suggesting that the Fed. should intervene on an enormous scale. So we are back to one of my themes of central bank intervention and muddling markets. I have a section on Quantitative Easing with my thoughts on it but at that time QE 2 was taken at face value and considered a likely benefit.

      Sometimes in crises the first human emotion is denial and perhaps that was also at play in the early part of the year. Also I think that if we step back authorities like the Fed. and the US government were making all sorts of claims and investors believed them. As time has progressed some of the claims for deficit reduction now look very weak after the tax cut/stimulus plan which made Americas politicians look weak I think. Also the TV interview given by Ben Bernake to CBS turned out to be a mistake as some of his claims made him look like a politician with his hyperbole. Some combination of these two events changed things in market psychology.

      Personally as I wrote on here I felt that the bond rally was a mistake in overall terms and showed many signs of being a bubble but if one takes that argument further then a bubble build and builds on itself before bursting. So far we have seen that but of course the future is unknown……

      I have been thinking about further updates on QE along the lines of it having a possible limit which if you exceed may reverse it effects or even if it is something of an illusion but these are just ideas for now I need to flesh out.

      One of the concepts I studied at the LSE was one where markets sometimes rally in order to then fall and I am wondering if the US government bond market will end up fitting this model.

      As to football I can add one thing. The Spanish clubs have been supported for some time by local/regional government. Going forwards the squeeze will be on in these areas and I will be interested in what happens with Barca and Real. They have been able to spend and spend like no tomorrow but I expect Spains coming problems to have an impact.

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