Sunday, May 10, 2009
I got a couple of nice emails from readers later, and I thought I would share my replies with everyone.
First, a couple of people said that the hugely negative PPI is accounted for by declining commodities prices and a lot of "wait and see" attitude among urban consumers. Here is my reply:
I think rich urban consumers are taking a wait and see attitude. You are neglecting the estimated 40 or so million who are unemployed at this point due to the export slump. Also, if commodities deflation accounted for most of it, why don't we see the same deflation in advanced countries. US PPI deflation was 1.2% in March (Jan, Feb was positive), while CPI was -.1% in March and positive for Jan and Feb. Consumers and firms in the US consume a heck of a lot of oil also, so how do you account for it? To be sure, China is factory of the world and is more vulnerable to price shocks of commodities, but we do not see any similar deflation among other net exporters in Asia, like Japan, S. Korea, or Taiwan. Another explanation is that wages are less rigid in China, and we are seeing wages plummeting in China. I think this probably explains some of the negative PPI, but it certainly does not help the consumption picture if true. Finally, there is massive over capacity in some sectors, like steel, which is driving down prices. This is partly caused by the stimulus program.
Another reader also wrote in to ask a question about my book (now as low as 23 bucks!). Basically, he asks whether my theory of factional politics can account for current events, as it seems the generalist factions have taken over economic policies during a crisis. My reply:
Wen is generally seen as a weak technocrat, but he has used this crisis as a way to strengthen central power. He abolished road tolls, centralized fuel tax, and started on a national health bureaucracy. The problem now though is not that the generalists are in charge, but that no generalist faction is powerful enough to delegate policies to Wen in the face of a crisis, which exacerbates the problem of Wen's perceived weakness. Back in the 80s, Deng, though reluctant to centralize, would delegate economic power to the technocrats when he had to. Now however, at least two elite factions (Hu Jintao, Xi Jinping, and possibly Zhou Yongkang) are jockeying for power, so no one can say that "Ok Wen, you are in charge here 100%". Instead, Wen is only getting Hu's support and facing opposition and delays from followers of other generalist factions.
In the conclusion of my book, I argue that the conflicts between generalists and technocrats are ultimately policy disagreements. The real fight is actually between generalists factions jockeying for power. In all politics (not just authoritarian politics), the worse thing for decisive decision is continuous struggle without resolution.
How does the stimulus package produce overcapacity in the steel sector? One would imagine that, because of all the construction projects started with the stimulus package, the market would be demanding more steel now.
I suppose the reason is that the steel producers also received their part of the "package" and are using it to increase production?
PS. I am one of the 小气s who was waiting for the paper cover of "factions". I have waited for months and I finally got it now, can't wait to read it/.
Based on official GDP (market-price, not PPP), China consumes three times as much oil per $ of GDP than Germany does, and 1.5 times as much as the US.
I have no data on iron ore, but considering the amount of iron produced in China, I would assume that iron ore prices also have a much bigger effect in China than in the US or Europe.
But I'm sure that commodity prices are not the only answer. For instance, corporate profits seem to have plummeted in many sectors, and this could be a sign of more intensive competition forcing down prices (if you go from "It's hard to keep up with all this steel demand" to "Will anybody buy our steel? Pleeeaaaaase!", margins are bound to suffer big time).
Based on that, I'd tend to reiterate that China's current deflationary environment isn't particularly unusual.
If you recall, last November, you wrote a post about how the local gov'ts and SOE's were probably bankrupt and that the stimulus funds from the central gov't were designed to keep them afloat and that the rest of the stimulus money, which was supposed to come from local gov'ts, probably isn't going to materialize...
fast forward to today...the FT reports that "most of the stimulus projects have been unable to start on time while others have proceeded slowly because of a lack of funds, according to a survey of 335 stimulus-related in-vestment projects conducted by the National Audit Office.”
I don't think that's a coincidence!