Posts Tagged ‘inflation’

China’s factory sector decreased dramatically, the most in 32 months, in fact, as the economy continues to weaken and concerns regarding a global recession heighten.

The severe fall in the HSBC flash PMI from 51 to 48 this past month reflects domestic weakness as a result of less output and new orders, even as exports increase. The flash PMI was the lowest since 2009. Added to the already unstable world economy, the news has sent financial markets into a quiet frenzy.

“I’m not sure if it (PMI) is a tipping point, but I think it adds to the evidence,” said HSBC economist Qu Hongbin. Beijing has initiated several measures already, aimed at helping small businesses, to support the economy. The sharp drop in inflationary pressure shows that the city still has hope if it brings in additional, special measures.

“There remains no need to panic,” Hongbin said. “Easing inflation provides room for more easing measures, which will keep China on track for a soft landing.”

Yingjiang County encountered severe damage following an earthquake that shattered Yunnan Province in southwest China.  This resulted in the collapse of many houses, as well as seven fatalities (and perhaps more).  According to the China Earthquake Networks Center the epicenter was monitored at 24.7 degrees north latitude, 97.9 degrees east longitude.

This can’t be good news when the country is attempting (successfully right now) to reduce property prices “with sales volume already falling following purchase restrictions by local governments.”  The attempt is to make housing more affordable for the Chinese.  But with this earthquake home prices are more likely to rise again, undoing all the good work of the local governments.

Wen Jiabao’s Work for Nothing?

It makes one feel bad for the Chinese premier.  Poor Wen Jiabao has been so resilient in his efforts to “’resolutely’ press ahead with controls on the property market…reiterating a pledge to keep housing affordable.”  As well, the government has pledge to take drastic actions on any irregularities that occur in the property market vis-à-vis tax and credit policies, forcing officials to become accountable for home price maintenance.

What the country should really do is to gradually increase interest rates but this should just be one piece in the puzzle of trying to control inflation.  Inflation is also impacted by escalating worldwide prices of raw materials and this has to be accounted for as well.

Asia’s economy is a bit of a mess.  Actually it's a  big mess.  And it doesn’t look like this situation is about to improve any time soon either.  Inflation looks set to continue; capital flows are extremely volatile.  But the fact that China has been trying to liberalize its currency exchange rate could be good news for economies in the region, enabling them to move away from trade settlement within the current global economic climate.  It’s a shame Pridiyathorn Devakula is somewhat removed from the political scene these days though.  Thailand’s previous Deputy Prime Minister is quite well-to-do these days.  His wife has a staggering Bt258 million to enjoy while their daughter isn’t too badly off either at Bt7 million.  Perhaps if the family shares some of its wealth it can pull the region out of its financial hole.

Yuan Goes International

But even if the Devakula family decides to keep their wealth to themselves (giving them near-billionaire status), the yuan need not suffer.  It seems like the government of China is moving toward the possibility of internationalizing this currency alongside the Euro and the dollar.  As well, plans are set for Hong Kong to become the traing center for yuan-denominated assets enabling foreign companies to “issue yuan-denominated assets in Hong Kong” which will also mean the Bank of China NY branch will be able to open yuan deposits.  The hope is that investment abroad will increase too.  As well, if they adopt Devakula’s idea of “co-operation among regional economies” to establish a benchmark currency, then the region’s economy could potentially peak.

 

 

Although it seems like inflation is sky-rocketing in China due to its escalating consumer price index, according to chairman of the leading food enterprise COFCO Ning Gaoning, grain prices will be stabilized because of the country’s “substantial reserves.”  While corn will probably drop, rice and wheat – two of the country’s major grains – will remain in high supply this year.  Indeed last year the country’s grain output increased nearly 3 percent with its rice inventory-to-consumption ratio being around 18 percent higher than anywhere in the world.  

Ning claimed that the escalation in world food prices was due to “global demands and extreme weather in major grain producing areas” along with general inflation and speculation.  He dismissed the claim that the price of agricultural products were behind global inflation since the recent peaks in farm produces occurred way later than those of other industrial products.  Ning also  predicted a high inflation in the next second months with a weakening from July to the end of 2011 but claimed that expectations were weaker this month because of various governmental measures to ensure market supply.  

As well, Ning noted how China still potentially has the capacit to increase the amount of grain it produces due to better rural infrastructure, and more low-yield farmland productivity.  Farmers are being encouraged to increase production and the government has invested significant funds in rural water conservation and farm irrigation projects.

 

The head of Fidelity’s institutional business in Hong Kong, Carlo Venes, said that international inflation-linked bonds are becoming more sought after by professional investors in Asia. They want to protect themselves against inflation and to balance their portfolios with non-dollar based investments.

Some analysts predict that Western central banks are following monetary policies which are too risky. Other analysts predict that deflation will follow the International financial crisis.

Verns explained that “The dispersion of views on inflation is huge.” “You have the camp that believes still that the western world will be in a Japan scenario for a decade. You also have the view that with all the printing of money, and all the central bank support, there is risk that, all the money that now sits on corporate balance sheets in cash, will accelerate the risk of inflation picking up.”

China’s inflation went up to a 25-month high of 5.1% in last November.