Inflation Concerns Slowly Rising in China

In recent weeks there has been a steady increase in "wagers" saying that the Chinese yuan will resume its appreciation in the coming months.

There appear to be two main drivers. First, the country's decline in exports is moderating. The 15% year-over-year decline in September was the smallest of the year so far. Second, last week the State Council (i.e. cabinet) signaled that inflation concerns should play a larger role in setting policy. The State Council's last statement in June did not mention inflation at all.

Consumer prices rose 0.5% in August for the first time in six months and, last week, the Vice Governor of the PBOC also noted that inflation pressures are gradually building.

Our contacts in China have been reporting since the summer that officials have become more concerned about these inflation figures, but with exports falling and the year-over-year rate of inflation still negative (-0.8% year-over-year), we feel that they can delay acting on it. We still suspect that China is unlikely to act to tighten monetary policy through hiking the 1-year rates, which remains at a 5-year low of 5.31%.

By re-pegging the yuan to the dollar, there has been a substantial decline in the yuan. Since April 1, the yuan has fallen almost 13.5% against the euro (the destination of more of its exports than the US), 7% against the yen, 33% against Brazil, 17% against the Korean won.

Chinese policy makers do not appear ready to bow to what appears to be renewed international pressure to allow the yuan to appreciate. Previously, discussion of global imbalances was a thinly veiled reference to the US current account deficit. It is increasingly being used as a reference to the need for the yuan to appreciate.

At the end of 1993, the dollar was near CNY5.824. Today it is at CNY6.827, or about 17% stronger over the past 16 years.

Disclosure: No positions

Comments

[Nikola:]

"At the end of 1993, the dollar was near CNY5.824. Today it is at CNY6.827, or about 17% stronger over the past 16 years."

If I remember correctly, it was also 8.25 in between?

Oct 27 06:30 AM