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Sun Kai
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This instablog exists to share with readers items of note in Chinese-language publications which might not otherwise get noticed in the West. The writer is an American corporate lawyer based in Asia.
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Eastern Prospectus
  • What's in China's CPI Basket? 0 comments
    Jan 17, 2011 9:42 AM | about stocks: FXP
    A question very much on people's mind both here and in the West. Chen Qing Lan chimes in with his take on the matter.  Translated from Ifeng.com:
       
                                                      ____________

    In China, the Consumer Price Index ("CPI") is becoming more and more of a joke.

    On January 21st, the National Bureau of Statistics (NSB) released their national macroeconomic figures for 2009. While GDP had increased 8.7%, the CPI had decreased .7%.
     
    This figure has absolutely nothing to do with the average person's personal experience.  So much so that many questions are being raised online.
     
    Let's look a little closer at the goods in the CPI basket:
     
    Of the eight basket categories, four rose and four fell.  Tobacco and Alcohol products rose 1.%, medical insurance and consumer goods rose 1.2%, food rose .7%, and [housewares and maintenance] rose .2%. On the other side of the ledger, Housing fell 3.6%, communications fell 2.4%, clothing fell 2.0%, and entertainment and educational cultural products and services fell .7%.  Compared with last November, November CPI turned from negative to positive, rising .6%. In December it rose 1.9%.  Factory goods fells 5.4% on the year but in December, this number also turned from negative to positive, rising 1.7%. Over the year, raw goods, fuel, and power purchases fell 7.9%; retail prices fell 1.2%.
     
    (Source: NBS Figures)
     
    Every grandmother going to the market to buy food knows that this ".7% rise in food price" is inconceivable. Whether we're talking about vegetables, meat, rice, or cooking oil, almost everything is at least 30% more expensive than last year.  Everyone who goes to a restaurant knows that prices there have also increased at least 30%. Maybe even higher than 50%.  In Beijing, at the smallest hole in the wall restaurant, it's almost impossible to find a stir-fry dish under 10 Yuan.  Most prices have already surpassed the 20, even 30, Yuan level.  A year ago it was the norm to pay 10-20 Yuan for a stir fry dish.  Gas prices are at a historical high, ask any driver.  They're 20% higher over the last year while electricity, gas, and water, are all increasing apace.
     
    I don't know what type of goods are in the NBS CPI basket.  This might be a state secret.   Us little people aren't allowed to know.  But I know that it definitely is a bunch of things that us common folk can not possibly buy. Sometimes, I really envy our comrades at the NSB.  After all, they can always buy those goods whose prices are declining.  How lucky for them!  I think the NBS should launch a new service: they should buy goods for other people. They could even levy a bit of a service charge. That would definitely be a thriving business!.  In this period of rising prices, their ability to buy those goods whose prices are declining is really a market opportunity.  Our comrades at the National Bureau of Statistics are perfectly entitled to earn this bit of money.
     
    If the CPI can not reflect the actual rise in consumer prices then I don't understand how this number can have any significance.
     
    That said, I didn't come here today just to whine about the figure.  I came to discuss a problem.  In order to explain this problem I will, for the time being, agree that calculated number is an actual, realistic reflection of today's prices.  What I want to say is this: even if the calculated number is correct, then this CPI number still does not have that much significance.
     
    Many economists and officials look at the CPI as being very important.  In their minds this number is inextricably linked with the idea of "inflation".  When economists are formulating their own theories and officials are setting policy CPI is the lead horse.  When CPI is high, say exceeding 3%, then they believe inflation is coming, and therefore act in a fluster to tighten credit.  When it hasn't exceeded 3%, then they believe there is no inflation, they even believe that it may signal deflation and so they adopt a somewhat relaxed monetary policy.  This is preposterous.
     
    When we treat CPI as an inflation number, the outcome is that the theory does not hold up in the face of reality.  It fails to persuade.  In 2009, asset prices, particularly real estate, rose rapidly.  Looking at it from a national perspective, real estate prices rose 30%. In Beijing, Shanghai, Shenzhen, these first-tier cities, the average rise in housing prices was 50-80%.  In some areas they more than doubled.  Many experts could not explain this phenomenon, they even fabricated this great intelligible concept: that it arose "in expectation of inflation".  Now, I realize the CPI basket doesn't contain housing prices,  so that's why we could see the strange phenomenon.  Towards this kind of phenomenon, if we can not explain it then we just need to be a bit creative and say its "the expectation of inflation".  Actually, if we don't restrict ourself to this [fallible] "cpi = inflation" framework, then we can know, this is certainly not any kind of "expectation of inflation".  This is the reflection of actual inflation.  The sharp rise in housing prices clearly demonstrates that actual inflation has already come.
     
    A lot of concepts we think of which are similar to this "CPI = Inflation" are actually quite wrong.  From the word inflation itself we can see, so called "exchange of currency" really just means "currency". [translators note: inflation [通货膨胀] = 通货 (currency, exchange of goods) +  膨胀 (to expand, inflate)].  Currency expansion has no other meaning; it simply means the money supply is increasing.  [...]. And the rise in the price of goods we're seeing, including such areas as daily consumption, housing, stock, raw materials, labor-- the increase in all these assets prices is just the result of an increasing amount of currency competing in the market to purchase these goods.
     
    Inflation only has one source: you're printing too much money.  A lot of cloudy-headed experts say inflation is brought on by a rise in oil, or by a rise in food prices, labor or pork prices.  This is all bullshit.  Inflation is brought on because there's too much money.
     
    In this era in which government credit is used to support currency creditworthiness, inflation is a common occurance. Because the cost of printing money is practically zero (really just a little bit of ink and the workers salary) money-printing organizations have enough incentives to continue to print money.  A lot of reasons are really quite pompous.  For instance, during the 2008 financial crisis, the government released large sums of money in the name of "rescuing the economy".  Most of the transactions between banks were handled using electronic transfer systems and so even the need for printing actual cash could be skipped over.  At present, monetary expansion even more embodies the scale of credit expansion.
     
    Further, now we have the central bank injecting money into commercial banks and from commercial banks into the overall economy.  But in each link of this chain the flow of money is not very well distributed. Noted economist Zhou Qiren once made an analogy-- He said "money is like honey". What he meant was that money is like dripping honey, it slowly expands outwards. At first when you drip honey its real thick in the middle but over time that honey will spread out until the entire surface plane is even.  When money enters into the economy it is the same.  In a situation where the government directs currency, it will always start with those industries who are closest to the government and the banks.  That currency, through a series of transactions with the broader markets will eventually creep to every link in the general economy.
     
    For those departments and industries who first received the money, let's say state-owned industries, they are still operating in a situation where the other industries have not seen any increase in money, and so prices are still in a pre-inflation period. Thus, those who get the money first become the ones who capture the opportunity and the first to be able to purchase underpriced merchandise.  This type of money first enters upstream industries like real estate, raw goods, oil, coal, and electricy. It raises the cost of products in these industries.  Afterwards, prices will gradually trickle down into consumer goods.
     
    So, from this analogy we can see that even though many prices rose steadily in 2009, the price of consumer goods still didn't rise.  They even fell.  This is not the non-inflation that the experts are saying. This is merely the stage where inflation has yet to flow to the production stage.  Inflation still hasn't affected our ordinary salaries.  It still hasn't changed the small private business owner's profits.  It still hasn't influenced consumer goods.  When we see an increase in the price of consumer goods that's when we know that the expanding money supply has completed its circuit.  It's at this point that experts and bureaucrats start to howl "Inflation's here". But by then it's already so late what's the use?    By this point no policy can be used to control inflation.
     
    Of course, the numbers released by the NBS will make some people doubt.  After all, the common folk have people already have experienced many rising prices.  Yet, the NBS says the CPI fell a bit.  It's natural that this will result in public complaint.
     
    The last thing I want to say is this- let's look at inflation and not look at the CPI.  let's use the "magpie seeing the duke of Huan of Qi" story we are all familiar with to make an analogy. When CPI is negative or at a small number, it might be a "sickness of the skin" or a "sickness of the tissue" or a "sickness of the bone".  Where it actually is, we don't really know.  But when we see that even the CPI indicator has risen.  Then we will know.  This definately is a sickness of the vital organs.
     
    Themes: China, Inflation Stocks: FXP
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