China has reported that its consumer price index was higher by 6.1% in September from a year ago. The inflation rate in August was 6.2%. The producer price index inflation was higher by 6.5%. The rate of producer price inflation had decelerated from the 7.3% seen in August. Further, the amount of new bank loans made in China in September was 470 billion yuan, down from 548.5 billion yuan in August, against expectations of 550 billion yuan. These facts point to a slowing economy and moderating inflation. Therefore, expectations have heightened that the People’s Bank of China (PBoC) will reverse its tight monetary policy.
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Well, it is unfair to hold PBoC responsible for monetary policy. That decision is made by the state council. The central bank in China is indistinguishable from the government that, in turn, is indistinguishable from the Chinese Communist Party.
But China is not clear if it should ease monetary policy, hold on to its current stance or tighten it further. Professor Patrick Chovanec called the country on the verge of a nervous breakdown. A glance at the front pages of http://english.caing.com, with its cocktail of sobering news, backs up his assessment. One headline screams that there is cash crash for Wenzhou’s private loan network. Another quietly points out that an industry veteran has accused the railway ministry of hiding losses in the first half of the year. The third headline reports the suicide of a property developer in the affluent inner Mongolian city of Ordos and the fugitive status of another developer.
This is not the news that you would hear from an economy that is in pristine health. That is why Chinese stocks have failed to react enthusiastically to the recent (inexplicable) rally in global stocks since October. The Shanghai Composite Index is up just about 3%, whereas India’s Nifty has risen nearly 10% from its early October lows; the S&P 500 is up little over 10%, while the German DAX Index is up nearly 15% in euro terms. It would be more in dollar terms, given the roaring return to strength of the euro versus the dollar. As one of my friends observed, economies either keep flying, or they land hard. There is nothing called soft landing. China is likely to vindicate him in the very near future, perhaps as early as in 2012.
The file photo of People’s Bank of China, Beijing, China (Bloomberg)
Elsewhere in Europe, while political leaders leak the news of their toilet breaks and the conversations they hold there to the financial media that laps it up with the breathlessness that exceeds the excitement seen when man landed first on the moon, the reality is that the euro zone has barely dealt with any of the underlying structural issues that the southern European countries face.
Some of my friends are more optimistic about the US than they are, for Europe. It is a reasonable stance to take—either as an investor or as a commentator. That is why the recent strength of the euro, more than anything else, is mystifying. They believe, as Winston Churchill did, that the US would eventually embrace the right solution after all else failed.
They could be wrong.
The US, typical of empires in their terminal years, suffers from hubris and groupthink. Not a single American economist or blogger—as far as yours truly searched—had anything critical to say about the ideology or theories of the economics Nobel Prize winner Thomas Sargent. It was left to the Financial Times commentator John Kay to pen a brilliant essay on the theories of Prof. Sargent and others of his ilk.
On the macro data front, the US consumer is feeling low and is trying to beat her blues by spending more on fewer goods as inflation bites into her fast-eroding purchasing power. The true unemployment rate in the country jumped to 16.5% in September, while the duration of unemployment lengthened as more people find it difficult to get another job if they lose one. The number of job openings in the US has virtually stagnated since February this year, as is the number of applicants per available job opening. There is no improvement in either of them since the beginning of this year. The personal savings rate is now below 5%, after having quickly crested at 8% in the wake of the crisis in 2008. Ben Bernanke must be proud of driving the bankrupt US household back into living beyond their means.
Around the world, social protests are gathering momentum. Unable to fathom and make sense of the volatility and deprived of assistance from Wall Street that they were once accustomed to, hedge funds are deep in negative territory this year, while their managers call the “Occupy Wall Street”protesters misguided.
When Churchill was advised to keep his ear to the ground, he is said to have commented that the public would not have much respect for leaders observed in that position. But investors would do well to heed that advice.
V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Your comments are welcome at firstname.lastname@example.org