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.
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.
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!