Where Has China’s Inflation Gone?

The Chinese government famously makes large purchases of US-denominated assets, mostly government bonds, in order to prevent the value of the dollar from falling relative to the renminbi. But how does it get that money? Brad DeLong explains:

(cc photo by Jakob Montrasio)

(cc photo by Jakob Montrasio)

It gets those 200 billion renminbi by borrowing them from the good burghers of Shanghai. By now the central bank owes the good burghers of Shanghai some 16 trillion renminbi. To them, this wealth is nearly as good as cash. It has been piling up for years–and because it is nearly as good as cash, the good burghers of Shanghai should be spending it.

They should be spending it. But the goods that are the counterparts of this financial wealth have been shipped via container to Long Beach. So demand in China should be massively outrunning supply, and China should be seeing strong and rising inflation.

But consumer prices don’t seem to be increasing notably fast. James Hamilton says he’s “wondering if the pent-up inflationary pressure takes the form of inducing consumers and businesses in China to try to acquire any hard assets they can, with the result that rather than overall inflation we see remarkable increases in the relative prices of such items.”

I think the evidence for this is mixed. People point to the existence of a real estate boom in China, as a possible US-style bubble. That could be the case. On the other hand, it’s genuinely the case that the vast majority of Chinese people have incredibly bad accommodations and also that the country is experiencing rapid economic growth. A large increase in the price of non-terrible housing units, combined with a boom in the construction of non-terrible housing units is just the thing you would expect when a country where most housing is terrible experiences rapid growth. To distinguish a “bubble” from “a bunch of people are sick of living in shacks” you’d have to look at the situation in considerable detail. This, though, is one reason why bubbles are hard to identify.

(cc photo by FotoosVanRobin)

(cc photo by FotoosVanRobin)

One of his other examples, however, concerns what certainly looks to be a garlic bubble:

Jerry Lou, a Morgan Stanley China strategist who has researched the opaque market here, said speculators– fueled by the abundant liquidity sloshing around China– have moved into the small market and strategically driven up prices.

“You need a warehouse, a lot of cash and a few trucks. That’s how it works,” Lou said, describing garlic speculators’ tools of the trade. “Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars.”

It’s hard to think of any rationalization for that.

Something that I think would be interesting to look into is whether we’re seeing inflation in the price of bribes. From everything you read about China, corruption is a very significant element of life. I assume one major line item for the aforementioned burghers of Shanghai is things like greasing the pockets of the right people so that your kids can go to the right schools, and get hooked up with the right jobs post-graduation. You might also be paying people to get permission for relatives form the countryside to move to the city. And I’m guessing that bribe-inflation doesn’t show up in China’s official economic indicators.

At any rate, given the state of the world economy a little inflation in China is hardly the worst thing in the world. Indeed, my best-case scenario would be for the Federal Reserve to adopt policies in the United States that would be inflationary in the short-term. That would put even more inflationary policy on China, which they would probably respond to by letting their currency appreciate somewhat. That would be a much better way to address the currency/trade balance issue than the alternative of getting China to adopt a less expansionary stance, throwing millions of Chinese out of work and reducing incomes throughout the commodity-exporting third world.